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7 



f 



THE 



ELEMENTS 



POLITICAL ECONOMY. 



FRANCIS WAYLAND, D.D., 

LATE PKESIDKNT OF BKOWN UNITBKSITT. 



KECASTBY 

AAHON L. CHAPIN, D.D., 

PBESIDENT OF BELOIT COLLEGE 



-^ No...//l</i....^ ' 



NEW YORK: 
SHELDON & COMPANY, 

8 Murray Street. 

1878. 



r 






DR. FRANCIS WAYLAND'S TEXT-BOOKS. 



MOJtAL SCIENCE, 1 vol. 12mo. JRevised just before the author's 

death, 
MORAJj SCIENCE, 1 vol. 18mo. Abridged by the author and 

adapted to schools and academies. 
INTEILECTTTAZ PJBIIOSOI'JIY, 1 vol. 12mo. Mevised just 

before the author's death. 
POIITICAI, ECONOMY, 1 vol. 12mo. Mevised by A. X. Chapin, 

in 1S78. 
POIITICAZ ECONOMY, 18mo. Abridged by the author and 

adapted to schools and academies . 

As an educator, no man in this country ever stood higher than Dr. Way- 
land. These books were built up from his work in the class-room, and are, 
therefore, adapted to meet the wants of both teacher and scholar. They are 
now used in most of the leading schools and colleges in the country. 



COFTBIGHT, 1878, BT SBCELDON & COMPANT. 



PREFACE. 



~1~\E. WAYLAND'S work on Political Economy was 
-*— ^ the first attempt in our country to present the 
principles of that science in the form of a text-book of 
instruction. His aim was to put into simple statement 
under a natural and methodical arrangement, the doc- 
trines of Adam Smith, Say and Kicardo, who were in 
his day, as they still continue to be, leading authorities 
on the subject. To the public generally the whole sub- 
ject was new. Dr. "Wayland therefore used abundant 
illustration and frequent repetition in this introduction 
of the science to youth and practical business men. His 
effort was attended with remarkable success, and no 
other text-book on the subject has gained such general 
acceptance and been so extensively and continuously 
used. 

But the forty years that have elapsed since Dr. "Way- 
land finished his work, have been years of wonderful 
activity and enterprise in all departments of productive 
industry and trade. Many practical problems of Politi- 
cal Economy have thus come to be studied in a new light 
and have elicited discussions earnest and profound from 



PREFACE. 



philosophers, statesmen, and practical manufacturers and 
merchants. The science itself has made progress, and its 
elementary principles ha^^e become more or less familiar 
and are readily apprehended by all. Special treatises on 
Capital, Labor and Wages, Money and Currency, Taxa- 
tion, Free Trade, etc., have thrown much light on the 
complicated problems which concern the development 
and distribution of wealth. While these things have 
caused little change in the real elements of the science as 
presented by our author, they demand that as a text-book 
of instruction adapted to our times, his work should be 
very considerably modified. 

Some months ago, the present publishers of Dr. 
Wayland's book requested the writer to make a revision 
of that work. Fully believing that the doctrines and 
the general aim and methods of that eminent instructor 
on this subject were sound and wise, and that the press- 
ing want of the class-room in our institutions of higher 
education, was not fully met by anj' one of the excellent 
treatises before the public, he consented and assumed the 
undertaking. It was soon found, however, that a mere 
revision of the book would not accomplish the desired 
object. Comparatively few pages of the original work 
could be used as they stood. In the result, while scarcely 
any change has been made in the opinions presented, the 
arrangement and the forms of statement have been quite 
generally recast with considerable condensation and many 
needed additions. 



PKEFACE. m 

In the prosecution of his work, the writer has had 
chiefly in mind the wants of the class-room as suggested 
by an experience of many years in the instruction of 
successive classes in college. His aim has been to give 
in full and proportioned, yet clear and compact statement 
the elements of this important branch of science, in their 
latest aspects and applications. In thus recasting the 
treatise, he has followed his habit before his own classes, 
and drawn freely from various writers, sometimes in 
formal quotations, but oftener by catching apt thoughts 
and happy expressions as they might serve his purpose. 
The writings of McCnlloch, Mill, Fawcett, Thornton, 
Jevons, and Brassey, of England, and those of Bowen, 
Perry, Carey, Thompson, A. Walker, F. A. "Walker, 
Sumner, and D. A. Wells, of oar own country, have 
been thus freely referred to and drawn upon. 

The work in its present form is oflered to the public, 
not as an original contribution to the science treated of, 
but as a compilation of well defined principles of the 
science, which, in the writer's view, are to be accepted 
as sound and true. On some disputed topics, positive 
opinions are expressed, with due revspect for the sincerity 
of those who may think differently, but in the strong 
conviction that they will stand the test both of philosophy 

and of practical experience. 

A. L. C. 

Beloit College, March 1, 1878. 



CONTENTS 



CHAPTER I. 
Preliminary Observations. 

PAGE 

Origin and Definition of Political Economy 3 

Fundamental Laws 4 

1. Men's Desires and Nature's Resources. 2. Labor neces- 
sary. 3. Labor establishes the Right of Property and Pos- 
sibility of Exchange. 

Materials of the Science 6 

Motive to effort, — Conflicting desires 7 

CHAPTER n. 
Definitions and Divisions. 

Wealth, — Errors respecting it 8 

1. Not identical with Money. 2. Does not include human 
beings and capacities. 3. Evidences of debt no part of 
general wealth. 4. Includes some things not tangible 
and durable. 

Sources of Wealth — Original — Secondary 10 

How Wealth is increased 11 

Value, — its strict definition 11 

Distinct from Price, and from Utility. 

Limits of Value— Utility— Cost 13 

Law of Supply and Demand — Monopolies 14 

The Practical End of the Science 15 

Its four leading Divisions 15 



Vlll CONTENTS. 



FII^ST DIVISION. 

CHAPTER Iir. 
Production. 

PAGE 

Its Elements — Nature's Gifts — Human Labor 17 

Threefold Subdivision 18 

Labor — Capital — The Cooperation of these two forces. 

CHAPTER IV. 
Labor. 

Definition — A Measure of Value 19 

Kinds of Labor. 1. Physical labor. 3. Mental labor 20 

What Physical labor does 20 

What Mental labor does directly 21 

1. Discovery. 2. Invention. 3. Oversight. 

Labor indirectly concerned in production 24 

Labor as Productive or Unproductive 25 

This distinction discarded. 

Changes effected by Labor 26 

1. Transmutation. 2. Transformation. 3. Transportation. 

Their Relation to each other 28 

CHAPTER V. 

Means for Increasing the Effectiveness of 
Human Labor. 

Natural Agents defined 32 

Agents which create Momentum 35 

Animate Agents 35 

Inanimate Agents 36 

1. Gunpowder, Dynamite. 2. Wind. 3. Water-power. 

4. Steam. 
Advantages of Inanimate over Animate Agents 40 

1. Amount of Momentum. 2. Continuity. 3. Economy. 

4. Personal Safety. 5. Freedom from Pain. 6. Increased 

Velocity. 



CONTENTS. ix 

PAGE 

Agents by which Momentum is applied 43 

Effects produced 4» 

1. Change of Direction. 3. Power for Velocity. 3. 
Power concentrated. 4. Delicate operations. 5. Power 
accumulated. 6. Sudden force made continuous. 
Lord Jeffrey's description of the Steam-engine 47 

CHAPTEE VI. 
Division of Labor. 

The Principle — how illustrated 48 

Essential to Civilization 49 

The Principle implies two things 51 

1. Analysis. 2. Distribution of parts. 

Advantages of Division of Labor 51 

1. Shortens apprenticeship. 2. Saves time in changing 
operations. 3. Saves time in adjusting tools. 4. In- 
creases skill. 5. Suggests inventions. 6. Employs di- 
verse capacities. 

Application to Intellectual Labor 56 

CHAPTER VII. 
Xiimitatious to Division of Labor. 

Four Restrictions 58 

1. The Nature of the Process. 2. Deficiency of Capital. 

3. Limited demand — Circumstances affecting demand. 
a. Number of Consumers. &. Wealth of people, c. 
Cost of the article, d. Facilities of Transportation. 

4. Limits of Executive Capacity. 

Evils incident to Division of Labor 64 

1. Danger to Health. 2. Contraction of Mind. 3. Loss 
of Independence. 4. Combinations. 

International Division of Labor 66 

Conditions of increase of Wealth 71 

1. Understanding Natui-e's Laws. 2. Means of applying 
them. 3. Adjustment of Labor. 4. Regard to local Re- 
sources. 



X COKTEiq^TS. 

CHAPTER VIII. 
Capital. 

PAQE 

Definition of Capital 73 

Not identical with wealtli — Not synonymous witli Money. 

In Origin, the fruit of past labor saved 74 

Forms of Capital 76 

1. Materials. 2. Implements and Machinery. 3. Means 
of Sustenance. 4, Finished products. 

Consumption of Capital 79 

Destruction necessary to production of value. 

Productive and Unproductive Capital 81 

This distinction discarded. 

Fixed and Circulating Capital 83 

The line of distinction not absolute. The tendency to 
turn circulating into fixed capital involves two dangers — 
1. That of over-production. 2. That of too sudden ab- 
sorption of a,vailable means. Money to be classed as 
fixed capital. 



CHAPTER IX. 
Co-operation of Labor and Capital. 

Labor and Capital true Partners 88 

Most harmoniously united in one person 89 

Reasons why this cannot be universal 90 

1. Capital tends to rapid increase. 2. Men have diverse 
capacities and tastes. 3. Large establishments necessary 
to some forms of production. 

Conditions which favor the Union of Labor and Capital 92 

1. General distribution of capital. 2. Ratio of capital to 

number of laborers. 3. Assurance of just reward to 

each. This depends on a. Division of property, b. 

Just laws. c. Unrestricted freedom. 4. Intellectual 

and Moral culture. 

Combinations and Co-operative Associations 110 



CONTElirTS. XI 



SECOND DIVISION. 

CHAPTEE X. 
Consumption. 

The Nature of Consumption 113 

Forms of Consumption 114 

1. May be of labor or of capital. 2. Voluntary or In- 
voluntary. 3. Rapid or gradual. 

Objects of Consumption 116 

Consumption for Eeproduction , 117 

I^ponomic rules for capital. 

a. For a given result, use as little as possible, h. Use 
capital of no greater value than necessary, c. Con- 
sume every utility of a substance — all the fragments 
— all the values. 

Economic rules for labor 130 

a. Employ no more labor than is needed. 6. Employ 
labor of no higher price than is necessary, c. See la- 
bor paid for, performed. This requires superintend- 
ence, regularity and proper tools. 

Consumption for Gratification 135 

Kinds of Gratification, a. Those which sustain health 
and life. b. Those which delight sense and taste, c. 
Intellectual gratifications, d. Social gratifications. 
e. Moral gratifications. 

Economy in gratifications 138 

Household economy — Economy of Intellectual and Moral 
Gratifications. 

CHAPTEE XL 
Public Consumption. 

Its Nature 136 

Means provided by Taxation 136 



XU CONTENTS. 

PA»E 

Purposes to which it is applied 139 

1. For support of Government. 2. For works of public 
advantage. 3. To advance science and diifuse intelli- 
gence. 4. For popular education — How far should the 
State provide higher education ? 5. For the care of the 
insane, the blind, the deaf, etc. 6. For the Relief of 
Poverty. 7. For the Nation's Defence. 
The Scale and Agents of National Expenditure 150 



THII^D DIVISION. 

CHAPTER XII. 
Distribution. 

The Scope and Definition of this Division 151 

The Parties to be recognized 153 

Laborers — Owners of Capital — The Government. 
Sub-divisions 153 

CHAPTER XIII. 
The Remuneration of Labor. 

Terms used — Wages — Salaries — Fees 154 

Distinction of Nominal and Real Wages 156 

The difference caused by, 1. Fluctuations in purchasing 
power of money. 2. Forms of payment. 3. Regularity 
of employment. 4. Duration of power to labor. 

Nominal and Real Cost of Labor 160 

Difference in industrial efficiency caused by, 1. Peculiari- 
ties of race. 2. Qualities of diet. 3. Personal habits. 
4. Intelligence of the laborer. 5. Technical education 
and environment. 6. Cheerfulness and hopefulness in 
labor. 

Leading Considerations determining Wages 166 

1. Cost of living. 2. Value of products, the wage-fund 
theory. 3. Customary rate of wages. 4. Most influen- 



COIS'TENTS. Xin 



tial of all, competition. Combinations to resist competition 
— Strikes — Trades-unions — Combinations of employers. 
5. The Golden Rule. 
The Genera] Law of Wages 181 

CHAPTER XIV. 
Variations in the Remuneration of Labor. 

(Special Circumstances affecting Wages 183 

Ease or difficulty of employment — Skill required — Con- 
fidence reposed — Constancy of employment — Certainty of 
success. 

Salaries, Commissions and Fees 185 

Self-made men — Educated men — The learned professions 
— Artists, Authors — Force of custom — Offices of honor. 

Kemuneration for Women's labor 190 

a. Physical and mental constitution, h. Home sphere, 
c. Prospective marriage, d. The actual organization 
of industry, e. Feminine instincts. /. Partial sup- 
port from friends. 
The case of vTomen of genius — Conclusions, 1. Absolute 
equality between the sexes unattainable. 2. Present in- 
equality unreasonable. 3. The true aim of efforts for 
reform. 4. Woman an equal partner in the home. 

CHAPTER XV. 
Remuneration of Capital. 

Capital entitled to Remuneration 197 

Rent — its Definition 199 

Several kinds of rent — Ricardo's theory. 
Rent of agricultural lands depends on 202 

1. Productiveness, by reason of a. Fertility. 6. Situ- 
ation. 

2. Growth and Concentration of Population. 

3. Incidental circumstances, a. Natural beauty of situ- 
ation, h. Character of neighborhood, c. Improve- 
ments. 



XIV CONTENTS. 

PAGE 

Rent of Mining Lands 209 

Eents in Cities 210 

The Fasliionable quarter — Business centres. 

Why Rent is less than Interest 213 

1. Security of property in land. 3. Title easily estab- 
lished. 3. Iniiuence of landholders. 4. Prevalent desires 
of men. 5. Prospective increase of value. 



CHAPTER XVI. 
Interest. 

Definition 215 

Considerations determining Rate of Interest 218 

1. Risk, depending on a. Mode of employing capital. 

b. Character of borrowers, c. Character of govern- 
ment. 

3. Convenience of investment 321 

a. Facility of transfer. &. Permanency of investment, 

c. Punctuality of payment. 

3. Productiveness of capital 223 

a. Fertility of land. b. Productiveness of industry. 
c. Demand for exchange. 

4. Ratio of Demand to Supply of Capital 224 

Why Interest in a new country is high 225 

Advance of Settlement reduces Interest 326 

Freedom of Capital adjusts Supply and Demand 237 

Rate of Interest not an index of Prosperity 339 

1 . Interest raised by risk indicates adversity. 2. Raised 
by increased productiveness, prosperity. 3. Reduced by 
diminished risk, prosperity. 4. Reduced by stagnation, 
adversity. 

Usury Laws unreasonable 230 

1. They violate the right of property. 3. Impossible to 
fix a price for capital. 3. The price of money especially 
variable. 4. Usury laws increase fluctuations of interest. 

5. They cannot be enforced. 

Dividends — Definition 334 

Dividends include Interest and Profits 337 



CONTEl!fTS. XV 

CHAPTEE XVII. 
Distribution of Profits. ^^^^ 

Definition of Profits 239 

Profits increased by spending less or producing more. 
Percentage on capital not a true measure of profits. 

Capita] may not claim all the Profits 243 

Co-operative Associations 245 

Capitalists, Managers and Laborers to share Profits » » » 246 

CHAPTER XVIII. 
Revenues of the Government. 

A Problem of Political Economy 248 

Taxation — Adam Smith's Maxims 249 

Direct and Indirect Taxation 250 

Heavy taxes on injurious articles 252 

Tariffs — Specific and Ad valorem Duties 253 

Two Systems of Taxation in America 254 

National Taxation chiefly Indirect by duties 255 

Also, a. Excises._ b. Stamps, c. Licenses, d. Income tax. 

State Taxation — Direct 258 

Mode of assessment and collection. 

Taxing Evidences of Debt involves double Taxation 259 



FOURTH DIVISION. 

CHAPTER XIX. 
Exchajige. 

Nature of Exchange 263 

Value the central term 264 

Purchasing power^A relative term — Distinct from price 
— Implies utility and cost — Maximum and minimum lim- 
its — The general formula of value. 

The effect of variation of demand and supply depends on 
a. Durability of the article, b. Eage of increasing sup- 
ply, e. The article as a necessity or a luxury, d. 
Relation to fashion. 



XVI CONTENTS. 

PAGE 

J. S. Mill's Fundamental Principles of Exchange 267 

Three classes of articles. 1. Things which cannot he in- 
creased. 2. Things multiplied at moderate expense. 3. 
Things multiplied at extraordinary cost. 
Respecting these it is to be observed, 
1. Value is a relative term, hence a general rise or fall of 
all values impossible. 2. Market value depends on de- 
mand and supply. 3. Things have a natural value to- 
wards which market value tends. 4. Natural value= 
cost value except with some things which have a scarcity 
value. 5. Things which cannot be increased have a per- 
manent scarcity value. 6. Monopoly value means scar- 
city value. 7. The cost value of a thing=cost value of 
the most costly portion of it, sold. 8. Causes of perma- 
nent high value. 

The Necessity of Exchange 270 

International Exchange 272 

Agents of Exchange 275 

Retail merchants — Middle-men — Factors — Jobbers — Ship- 
ping merchants — Importers — Bankers — Brokers — Under- 
writers. 



CHAPTER XX. 
Money an Instrument of Exchange. 

Difficulties of Exchange by Barter 282 

Money Defined — Its two Functions. 284 

A Standard of value — A Medium of exchange. 

Whatever measures Value must possess Value 285 

Essential qualities of a Medium of Exchange 287 

Stability and precision of value — Universal acceptable- 
ness — Divisibility. 

Articles used as Money 289 

Necessary qualities of Money 290 

Qualities which fit Gold and Silver for the purpose 293 

1. Intrinsically desirable. 2. They cost labor. 3. Large 
value in small bulk. 4. Divisible without loss. 5. Qual- 
ity uniform. 6. Value easily verified. 7. Indestructible. 
8. Adapted to each other. 



CONTENTS. XVll 

PAGE 

General Truths concerning Money 296 

1. Money and the article exchanged for it equal in cost. 

2. Universal commerce equalizes cost and supply of money. 

3. The amount of money small in proportion to the whole 
trade. 4. Increase of production and trade demands in- 
crease of money. 5. Abundance of money not a certain 
index of prosperity. 6. A false maxim refuted. 

Agency of Government respecting Money 299 

1. To define a legal tender. 2. To coin the metals. Coin- 
age must have regard to, 1. Purity of metal. 2. Size. 
3. Form. 
Seignorage — A uniform international coinage desirable. 

The question of a Double Standard . . . . 305 



CHAPTER XXL 
Credit an Instrument of Exchange. 

The Nature of Credit 309 

The Forms of Credit. 310 

1. Book Accounts. 2. Loans. 3. Mercantile Paper. 4. 
Bank Deposits. 5. Stocks. 6. Bonds. 7. Notes for Cir- 
culation. 

The Useful Functions of Credit 313 

1. It brings wealth into use as capital. 2. Gives efficiency 
to industrial talent. 3. Quickens exchanges. 4. A direct 
instrument of exchange. 5. Credit may under limitations 
enter into currency. 
For all, a basis of sound money indispensable. 

The Mischievous Abuses of Credit 821 

1. Too freely granted. 2. Used for wild speculation. 3. 
Extravagance of debtors. 4. Confidence operations. 5. 
Over-estimate of assets. 6. Betrayal of trusts. 7. Ex- 
cessive issue of currency. 

Consequent Mischiefs 325 

a. Fluctuating prices, h. Enhanced risks of business. 
c. Trade made a game of chance, d. Moral sense 
deadened, e. Force of contracts relaxed. 



XVlll CONTENTS. 

CHAPTER XXII. 
Banks and Currency. 

PAGE 

Banks, Agents of Credit 339 

Three Offices of Banks . . , 32U 

1. To collect and hold money in safe keeping. 2. To loan 
and discount money. 3. To issue circulating notes. . 

Facts from the History of Banks 333 

Bank of Venice — of Genoa — of Amsterdam and Hamburg 
— of England — Scotch Banking System — Bank of France. 

Banks in the United States - 386 

State banks — The Suffolk bank system — Safety-fund 
banks — Free banking — Two United States banks — The 
National bank system — Private banks — Savings banks. 

The Liabilities and Resources of our National Banks 341 

Liabilities. 1. Capital Stock. 3. Circulation. 3. Deposits. 
4. Balances due other banks. 5. Reserves. 6. Undivided 
Profits. 7. Miscellaneous liabilities. 

Resources. 1. Loans. 3. U. S. bonds deposited for cir- 
culation. 3. Bonds and stocks held as investments. 4. 
Balances due from other banks. 5. Real estate. 6. Cash 
items. 7. Currency. 8. Funds to redeem circulation. 9. 
Miscellaneous items. 

The Sources of Profits of National Banks 343 

1. Interest — a. On U. S. bonds. 6. On circulating notes. 

c. On remaining capital, d. On deposits loaned. 
3. Premiums on exchange. 3. Commissions for collec- 
tions. 

Currency — Four Kinds .- 344 

1. Value currency. 3. Mercantile currency. 3. Mixed 
currency — Distinction between ultimate redemption and 
immediate convertibility — Precautionary measures of 
Bank of England. 4, Credit currency, transfers without 
paying debts — Cannot go abroad — Keeps prices fluctuat- 
ing — Lays a direct tax on the people — Is a forced loan — 
Disturbs commerce and industry — Demoralizes a people. 



CONTENTS. XIX 

CHAPTER XXIII. 
Free-Trade vs. Protection. 

PAGE 

Definition of the two terms 354 

The Presumption in favor of Free-Trade 355 

1. Freedom a general economic law. 2. The right of 
property implies freedom. 3. Social instincts prompt to 
free exchange. 4. Free-trade promotes the peace of na- 
tions. 5. Nature's varied gifts designed for one human 
family. 
Arguments for Protection 358 

1. Necessary to varied industry — a. Every country has 

varied resources. 6. Also diversity of talent, c. Men 
have diverse wants, d. Varied industry makes a 
home-market, e. Promotes social and moral ad- 
vancement. 
All this admitted. But is Protection necessary to secure 
these advantages ? — It cannot add to natural resources — 
nor create capital— ^nor multiply labor— It only changes 
direction of labor and capital — No protected infant indus- 
try ready to dispense with this aid. 

The result is reached in a better way 364 

a. Human industry has a natural development, b. 
Free competition is its best stimulus, c. As labor 
and capital increase all resources are used. d. The 
instinct for accumulation a safe guide, e. Artificial 
forcing produces reaction. /. Foreign products pur- 
chased by fruits of home-labor, g. Foreign competi- 
tion cannot crush the natural growth, h. Artificial 
nursing makes a sickly growth. 

2. Protection maintains National Independence 365 

3. Agricultural products need a home-market. 367 

4. Protection must resist the competition of pauper labor 369 

5. Protection develops skill 369 

6. Protection a means of retaliation 370 

7. Protection sustained by wise advocates and by past 
usage of nations 370 

Positive Objections to Protection 372 

1. It fosters antagonism of industries. 2. It leads to 



XX CONTENTS. 

PAGE 

over-production and stagnation. 3. It lays a heavy tax, 372 
yet reduces revenues. 4. It is an unstable policy. 5. 
Demoralizes legislation. 6. Corrupts public morals and 
civil service. 

Historical Results examined 377 

Protection a relic of Feudal restriction and isolation — 
The experiment of Free-trade between our States. 

CHAPTER XXIV. 
Railway Corporations. 

Benefits of Railways, words of Judge Paine 381 

Nature of a Railway Corporation 383 

1. A creature of the State. 2. An agent of the State. 3. 
A practical monopoly. 

Relations of Railway Corporations to general industry 385 

1. They give the last addition of value. 2. Enlarge the 
market. 3. Quicken exchanges. 4. Depend on produc- 
tiveness of industry, 5. May diminish returns of in- 
dustry. 

Administration of Railway Corporations 386 

A few managers wield great power. 

Abuses in the management 387 

Reckless expenses and credit — Interests of stockholders 
sacrificed by leases and combinations — Credit Mobilier — 
Stock speculations — Watering stock — Ruinous competi- 
tions — Carrying legislation by bribery. 

Statesmanship and public sentiment must correct evils 390 

CHAPTER XXV. 
Commercial Crises. 

Speculation the prime cause 391 

A Panic the turning point 392 

The Gold Bank and Trast Company of San Francisco — 
The Tea specalation of 1839 in England — Tobacco-raisers 
on the Connecticut River — Western land speculations and 
the crisis of 1837. 



CONTENTS. xxi 

PAGE 

The practical problem of commercial crises 397 

Economic principles to be regarded. 

The world-wide iinancial derangement from 1875-8 398 

Causes, 1. Increased production by labor-saving machin- 
ery. 2. Expansion of credit necessary to large establish- 
ments. 3. Extravagant ways of business and of living. 
4. Increased expense of wars and expanded national 
credit. 5. The United States war of the Rebellion and 
Franco-German war. 



POLITICAL ECONOMY. 



CHAPTER I. 

PKELIMINARY OBSERVATIONS. 

Origin of the Name, — Mankind are constituted 
mutually dependent and cooperative. Hence by neces- 
sity, they live in Society and tke highest good of the 
individual is identified with a common good. The first 
and simplest form of society is the Family, living under 
a common house-roof. Thus, very naturally, the Greeks, 
whose inquisitive minds pried into the philosophy of all 
things, grouped the elementary principles of men's social 
life under the term oiicovofua, — economy/, the laio of the house. 
They used the term with reference mainly to a thrifty 
provision of comforts for the well-being of the members 
of the household. 

As individuals make up families, so families make up 
cities and states. The elementary principles of the 
broader association are essentially the same with those of 
the primary societies. Hence the term Political Econ- 
omy, applied to the community, in a body politic, as 
domestic economy is to the household. Aristotle first used 
the term with a signification vague and general. It has 
come now to have a technical meaning. Usage has re- 
cognized its intrinsic fitness to indicate that department 
of truth which is concerned with the well-being of men in 



4 POLITICAL ECOXOMT. 

society as affected by wealth. It is not likely to give place 
to auy substitute. .The adjective "Political" means 
simply pertaining to the city or state. It implies nothing 
of politics in the ordinary sense of that word. 

Its Definition.— Po/'jY?'ca? Economy is that branch of 
Social Science which treats of the production and applica- 
tion of 'wealth to the loell-heing of men in society. ) It is a 
branch of true science. 

' By Science, as the word is here used, we mean a Sys- 
tematic arrangement of the laivs lohich God has established, 
so far as they have been discovered, of any department of 
human Tcnoivledge. j It is obvious, upon the slightest reflec- 
tion, that the Creator has subjected the accumulation of 
the blessings of this life to some determinate laws. Every 
one, for instance, knows that no man can grow rich, with- 
out industry and frugality. Political Economy, 
therefore, is a systematic arrangement of the laws by 
which, under our present constitution, the relations of 
man, whether individual or social, to the objects of his 
desire, are governed. Man's hand joins with the hand of 
fellow-man and with the powers of nature to produce 
wealth. 'Hence the processes and the legitimate end of 
the science imply a combination of the laws of the material 
world with the laws of man's social nature. ^ 

Fundamental Laws. — The science is based on four 
f undame]\tal laws. 

1. God has made man a creature of desires and con- 
stituted the material world in which he lives with qualities 
and powers available for the grcttification of those desires. 
As men advance in individual and social ^development, 
their desires are multiplied. At the same time by their 
increased intelligence and ingenuity, the resources of 
nature are. unfolded in full proportion. Desire stimu- 



PRELlMIlSrARY OBSERVATIONS. 5 

lates invention and successful invention wakes new desires. 
There is no assignable limit to the development of either 
men's desires or nature's resources. ) 

( 2. For desires above the very simplest wants of the 
animal, man must, iy Labor, force nature to yield her hid- 
den resources. \ Things most essential to mere animal life 
are furnished by nature in available form, demanding, on 
the part of men, only such exertion as is necessary to take 
and use them. We can hardly avoid the light, or refrain 
from breathing the air. Water bubbles up from the ground 
to quench thirst, and the spontaneous vegetation of the 
earth offers something already prepared for food. But for 
those desires which unfold with the exercise of our rational 
faculties, from anticipations of the future, from the con- 
ception of possible enjoyments, from the choice of a free- 
will making selection according to taste, from the love of 
admiration, from the love of power, from the spirit of 
benevolence — for these, nature hides the means of gratifi- 
cation and yields them only to the toil of contriving mind 
and muscular force, i' The conveniences and comforts of 
civilized life are the fruits of human Labor. ' 

; 3. The exertion of labor establishes a right of Property 
in the fruits of labor, and the idea of exclusive 2JOssession\& 
a necessary consequence; Personal rights begin with the 
consciousness of individual being and of individual achieve- 
ment ; and the idea of labor expended in the production 
underlies directly or indirectly the property-right to any- 
thing. Originally the thing produced belongs to him who 
produced it by an intuitive conception of rigiit, and the act 
of appropriation is as instinctive as the act of breathing. • 
Mr'^'^With the right of property, comes also the possibility 
4uith the right of Exchange, or the mutual transfer of 
possessions between man and man, and between different 
communities and countries. One may do what he will with 
his own. The transfer in good faith and perpetuity of an 



6 POLITICAL ECONOMY. 

object gained by labor constitutes a title to possession as 
well grounded as that which rests immediately on labor 
performed. We are brought thus into the sphere of man's 
social life with its manifold and complicated relations, from 
which proceed the most powerful incitements to stimulate 
desire, to nerve up labor, to maintain rights and to multi- 
ply and distribute the innumerable elements of wealth. 

Materials of the Science. — The materials of this 
branch of science lie fixed in the nature of man, and of 
the physical world which he controls, and in the structure 
of human society. ; They are drawn out by the study of 
men's wants, the investigation of nature's resources, the 
study of statistics of human i7ivention and industry, and 
the defining of pi^iyteiples for common and reciprocal agencies 
in social relations. { This science combines elements of 
both physical and metaphysical philosophy. It differs from 
the purely physical sciences in that the phenomena of 
human volition are continually involved in the system. It ' 
differs from the branches of intellectual and moral science 
in that it contemplates all soul-phenomena with reference 
mainly to certain physical results. Its leading propositions 
must often express te7idencies rather than actual facts. Its 
conclusions must rest often on the balance of probabilities, 
rather than on pure and perfect demonstrations. 

The Motive to E£fort.-{-Political Economy regards 
self-interest as a universal motive of human action, and it 
studies the mutual relations and intercourse of men as gov- 
erned by that motive. It assumes that labor ts irksome, 
and that every body desires the utmost possible gratifica- 
tion with the least possible exertion. Its great problem is 
to find a common interest which, as the resultant of indi- 
vidual self-interest, properly combines and regulates the 
separate forces. Its principles point to the golden rule of 



PRELIMINARY OBSERVATIONS. 7 

Christ as the formula by which the problem must be finally 
solyed. 

V Conflicting Desires. — Three desires inherent in 
every man contend for the mastery. 

1. Desire of Ease. 

2. Desire of Present Gratification. 

3. Desire of Means to ensure Future Gratification. ) 
The resultant' of these conflicting desires measures for 

any one his interest in the accumulation of wealth. The 
degree in which the other two are held subordinate to the 
third determines the productive activity of a community. 



CHAPTER II. 

DEFINITIONS AND DIVISIONS. 

Wealth. — This is the central term in Political Econ- 
omy. The word is commonly used loosely and vaguely. 
A clear and strict definition of it is essential to a right 
understanding of this science. 

The generic term Wealth embraces all useful things which 
can be appropriated and exchanged. This definition com- 
bines two qualities, first, Utility or fitness to gratify desire ; 
second, Ajjpropriability, or fitness to be seized and held in 
exclusive possession. Whatever lias both these qualities in 
any degree, is a part of wealth. Whatever lacks either is 
excluded from wealth. Perhaps we cannot say of anything 
that it has absolutely no utility, for God has made nothing 
in vain. But in their place, relatively to gratifying any 
desire of man, the sand on the sea shore, the crags of the 
mountain-top, the debris of a demolished building are 
"without utility. No accumulation of such things can be- 
come wealth. On the other hand, such things as the air 
and the sunlight have the very highest utility, insomuch 
that they are essential to the very life of every man, but 
their universal diffusion precludes their being appropriated 
as the exclusive possession of any. Therefore they form 
no part of wealth. 

Errors respecting Wealth. — 1. It is an error to 
identify wealth with money: Money, though it measures 
all things, and is a medium of exchange for all, itself forms 



DEFINITIONS AND DIVISIONS. 9 

but a small part of the sum of wealth. It is desirable not 
for its own sake but for the wealth in other forms which 
it can purchase. The so-called "Mercantile System" 
which long ruled the policy of nations with mischievous 
effects, rested upon this radical error. Its doctrine was 
that whatever tends to heap up money or bullion in a 
country adds to its wealth, and whatever sends the precious 
metals out of a country impoverishes it. Hence commerce 
was conducted with a sole view to bringing gold and silver 
into a country. That system is now exploded, but the 
false idea still lingers in many minds to confuse and com- 
plicate problems of both private and public finance. 

2. [It is an error to class as wealth human beings or their 
native capacities or acquired abilities. Physical strength, 
intellectual genius, moral character, professional skill are 
possessions of highest worth. But they are an inseparable 
part of one's own being. They cannot be directly trans- 
ferred from one to another. They are "powers for the pro- 
duction of wealth, but only the products which come from 
their exercise can be counted into the sum of wealth. 

S.Cit is an error to regard mortgages, bonds, stocks and 
the like as a part of general wealth. - These things only 
indicate a title to possession, a mode in which some real 
wealth is distributed. The mortgage which one holds 
simply divides the farm on which it rests between the 
nominal owner and his neighbor. The wealth is in the 
farm. It is not increased a whit by the mortgage itself. 
A bond of the United States for one thousand dollars, only 
gives its holder a lien on the solid wealth of the country 
for that amount, to be drawn some day from the tax-payers. 
A. B.'s certificate for fifty shares of stock in a railroad, 
means that he is the owner of that proportion of the land, 
the rails, the engines, the cars and whatever else canstitutes 
the property of that corporation. Its division into one 
hundred thousand shares distributed to one thousand dif- 



10 POLITICAL ECONOMY. 

ferent persons makes no more of that wealth than if a 
Yanderbilt owned it all. In the estimate of one's individ- 
ual property, he may count in all that he owns of this kind. 
The fact to be noted is that these do not add to the sum 
of general wealth, but only show how some portion of 
wealth is distributed. They are Symbols not Substance. 
Many a mischievous illusion comes from mistaken views 
of these things. 

4. It is an error to exclude from the category of wealth 
everything ivhich is not tangible and durable. The song of a 
Jenny Lind and the eloquence of a Wendell Philips impart 
a high gratification which can be appropriated by those 
who gain admittance to the hall where they are produced. 
The song is produced by labor applied to the air, which 
develops hidden properties of sound, viz., tone, melody, 
rhythm, which meet a human desire. What more can be 
said of a coat made by a tailor ? \ The two products differ 
only in that the coat gives a moderate pleasure, prolonged 
for months, and may be laid up in store ; while the song 
gives a keen, it may be ecstatic enjoyment for an hour, 
only the cherished memory of which can be retained. It 
is wealth, impalpable, evanescent, consumed as soon as pro- 
duced. It meets our definition, though it cannot be stored 
or counted. 

\ Sources of Wealth. — The original source of wealth 
is the bounty of God in nature., Man can neither create a 
particle of matter nor impart to it any new property. He 
can only develop and modify what God has made, which is 
free to all, restricted only when actually appropriated by 
labor. Over the whole material creation, he is set in full 
authority to search, to subdue, to control and to use. 

\ The secondary source of wealth is hitman labor exerted 
to bring forth the bounty of nature in form, in time, in 
2)lace, suited to meet the desires of men. This gives the 



DEFINITIONS AND DIVISIONS. 11 

right of possession which controls both the gift of nature 
and the added utility imparted by labor. 

How Wealth is increased. — Wealth in every form 
must be perpetually renewed. It is maintained only by 
a constant process of reproduction, i. e., of consumption for 
reproduction. It grows only as that which is produced 
exceeds that which is consumed in capacity to gratify 
desire. Mill says, " The greater part of England's wealth 
to-day was produced within the last twelve-month." To 
accumulate wealth, labor must go beyond what is essential 
to meet immediate necessities ; and the check of fore- 
thought and abstinence must be laid on the immediate 
consumption of the products of labor. Hence industry and 
frugality are indispensable conditions of the increase of 
wealth. These are characteristics which distinguish civil- 
ized from savage men, and thus wealth becomes a sign of 
Civilization. , 

Value. — In ordinary usage, this word often expresses 
only a vague idea that the thing to which it is applied is 
desirable. But as a technical term, in Political Economy, 
it holds a place of highest importance. Ambiguity in its 
use causes much confusion of ideas on economical problems. 
Hence the necessity of a strict definition to be strictly 
adhered to. Formerly a distinction was made between 
Intrinsic Value and Exchangeable Value. But all that 
was meant by intrinsic value is better expressed by the 
word Utility, land this is now quite generally adopted in its 
place, leaving value with one distinct signification which 
may be stated thus. 

1 Value is Purchasing Power, or that quality in an object 
which gives it power to command other objects in exchange. \ 
It supposes always a comparison of two objects in view 
of an exchange, actual or contemplated. It is not like 



12 POLITICAL ECONOMY. 

Aveiglit, an absolute, inherent quality of a substance. It 
cannot bo discovered b}' examining an article by itself.. 
Value is always a relative term}) The measure of it pertain- 
ing to anything can be expressed only by naming some 
other thing for which it ca.n be exchanged — the quid pro 
quo. Thus the value of a hat may be set down at four 
bushels of wheat or a quarter of an ounce of gold, be- 
cause it will command so much of one or the other in 
exchange. 

! Value in Distinction from Price. Value is the power 
to command commodities generally. Price is that power 
with reference to a single article, viz.. Money. \ Money is the 
general standard of vahie, and so value may be indicated 
by a comparison of prices, but it is important to observe 
the distinction between the two terms. The value of a 
specific commodity may rise or fall. Thus the hat which 
brought four bushels of wheat last year, may bring but 
three this year. To discover which of the two has changed 
in value, the cause affecting one or the other must be in- 
quired into. It may be that a failure of crops has en- 
hanced the value of wheat, or that some new invention, 
cheapening the process of manufacturing, has lessened the 
value of the hat. But there can he no general rise or 
fall of all values. There may be however,' a general 
rise or fall of prices in consequence of some cause, like 
an expansion or contraction of paper currency, which 
affects money, the one object with which all things are 
compared. 

Value in Distinction from Utility. — Utility is simply 
adaptedness to satisfy a ivant, or to gratify a desire. 
Things that have value, have always utility in this sense of 
capacity to gratify desire, without reference to the quality 
of the desire as right or wrong, wise or foolish. The power 
of a commodity in exchange is measured by its desirable- 
ness. ( But some things of the very highest utility have no 



DEFINITIONS AND DIVISIONS. 13 

value, as for instance air, light, water. We cannot live 
without them, yet they have no value, no purchasing 
power, because the supply is so large and so free that who- 
ever will may take to his satisfaction without labor. They 
cost nothing, and they cannot ordinarily be appropriated 
in exclusive possession. 

The laimits of Value. — With these distinctions in 
mind, it is plain that value may be resolved into two 
elements, viz. 

1. Utility = desirableness for gratification. 

2. Cost = difficulty of attainment, measured by 
the amount of labor necessary to secure the 
object. 

By these two elements the limits of value are defined. 
' The Maximum limit of value in any commodity is defined 
by its Utility. < That is, its purchasingpower is determined 
by the intensity of desire for its possession by the parties 
to the exchange. This will depend on a variety of circum- 
stances, such as the taste of individuals, the fashion of the 
day, the emergency of the hour, etc. The value may and 
often does fall short of this, but can never go beyond it. 
We seldom give for a loaf of bread an equivalent which 
expresses the measure of its utility to support life. But 
under the pressure of famine its value is ci'owded up close 
to this limit. When a man offers ten thousand bushels of 
wheat for a choice diamond, he expresses only the intensity 
of his desire for the glittering gem. 

The Miyiimum Limit of Value in any article, for any 
long time, is defined by its Cost,, tha.t is, the exponent of 
the labor either actually expended in its production, or 
which must be expended for its reproduction. When the 
market value of a commodity falls permanently below its 
cost, its production is suspended. If however, tliere is 
good reason to believe that its value will rise again, it may 



14 POLITICAL ECONOMY. 

be good economy to tide over the temporary depression by 
exchanging at a rate less than cost. A diamond of great 
beauty may become the property of one, at the cost only 
of the labor of picking np what, by good luck, he chanced 
to find. Its value is however, estimated by the probable 
labor involved in a continuous search to obtain its equal. 
In the last analysis, the comparison is of labor with labor, 
and it is true as has been said, that '^ service for service 
rather than commodity for commodity is the rule of value 
and the law of exchange." 

The Iiaw of Supply and Demand. — Between 
these extreme limits of value, there is room for a consider- 
able variation which is determined by the law of Supply 
mid Demand. Concisely stated, this law is that, with cost 
as its stable foundation, valuv increases directly as the de- 
mand and inversely as the supply.) The degree of variation 
thus caused depends on several circumstances. \ The neces- 
saries of life are more affected than luxuries, by diminished 
supply. Excessive supply reduces the value of perishable 
articles such as fruits and fish, far more than that of 
enduring articles like iron and cloth. Commodities that 
can he quickly produced to meet a special demand will fluc- 
tuate but slightly in value. The freahs of fashion subject 
fancy goods to far greater variation than staple goods. 
Eeduced value extends demand, and enhanced value re- 
stricts demand quite beyond the mere ratio of the change. 
Thus a thousand persons will use cotton cloth at ten 
cents a yard, where a hundred would use it at fifty cents. 

IVEonopolies artificially limit supply for the purpose 
of increasing value. Thus it is said that at one time the 
Dutch, who had a monopoly of the trade in pepper, actually 
destroyed part of an extraordinary crop, rather than per- 
mit the market- value to be reduced. When left free from 



DEFIliriTIONS AND DIVISIONS. 15 

artificial interference, demand and supply rush towards an 
equilibrium; and the condition of stable equilibrium is 
that things exchange for each other according to the cost 
of production, or as some express it, according to their 
natural value. 

The Practical End contemplated in Political Econ- 
omy is the Production of wealth, in the largest measure 
and of the highest value, and its application to the fullest 
and most general Satisfaction of men's desires. ] 

I Divisions. — Logically, the science resolves itself into 
two leading and two subordinate divisions. The two lead- 
ing divisions are Pkoductiok and Consumption. 

' Production is the act by which we confer a particular 
value upon any object, or by which we give to an object its 
adaptedness to gratify desire. We can neither create nor 
annihilate any thing. All that we can do, is, to modify 
what already exists. When we so modify any thing that it 
is capable of gratifying a desire which before, it was not ca- 
pable of gratifying, our so doing is called production. Un- 
der this division are presented the process and laws which 
relate to the development of wealth by the creation of Value. 

\^ Consumption is the art of destroying wealth in its 
use for the gratification of desire. The destruction of 
wealth in one form, for the sake of bringing out wealth in 
another form of greater utility and higher value, belongs 
to the department of Production. The destruction of 
wealth without yielding either gratification or increased 
value, as when goods are swept away by flood or consumed 
by fire, is of itself, only a calamitous interference with the 
laws of our science. ( Under this second division we study 
only the laws which govern the economical use of wealth to 
meet wants and impart gratifications. 

All production is for consumption. Yet consumption 
is antagonistical to production, as it uses up the means of 
production. Yet, again, a sound and healthy consumption 



16 POLITICAL ECO]<rOMT. 

is a stimulus to production ; and conversely, profitable 
production increases consumption as it multiplies and 
cheapens the means of gratification. 

r 

Between these two leading divisions come in the two 
subordinate divisions, Distkibutiok and Exchange. , 

Distribution. — The productive effect of human ac- 
tivity is greatly increased by union of effort and division 
of labor. When the product is realized and the results are 
to be divided, some equitable law is to be adopted in the 
distribution. Under Distribution therefore, are embraced 
the processes and laws which' relate to the division of^ tlie 
results among the parties who unite in producing values. •') 

Exchange.— The mode of every man's industry is de- 
cided by his individual tastes, capacities and circumstances. 
It is commonly, however, confined to the creation of one 
kind of product, inasmuch as it is thus vastly more avail- 
able. His desires, on the other hand, are as innumerable 
as the objects created to gratify them. He creates but one 
value and he wants a thousand. Hence, he can be gratified 
by means of no less than nine hundred and ninety-nine 
exchanges. He thus parts with various portions of the 
value which he has created, for the sake of obtaining values 
which others have created. Hence the necessity of uni- 
versal and ceaseless exchange. ' Under Exchange are brought 
to view the processes and laws which relate to the mutual 
transfer of values. ) 

The channels through which Production, the means, 
carries its results on to Consumption, the end, run through 
the domains of Distribution and Exchange. Tlie processes 
and laws of Production and Consumption are simple and 
easily apprehended. The difficult problems of Political 
Economy pertain almost entirely to the matters of Dis- 
tribution and Exchange. , 

These four divisions will be treated of in the order in 
which they have been here presented. 



CHAPTER III. 

FIKST DIVISION.— PRODUCTION". 

It is obvious that when man was first created, there 
existed nothing but this earth, with its various substan- 
ces, their qualities and relations ; and man, with his vari- 
ous physical, intellectual, and moral powers. The dif- 
ference between the present state of man and of the 
universe around him, and the original state, consists in 
this : that the qualities and relations of things have now 
been discovered, and rendered available for the service of 
man ; and the intellect of man has been cultivated, and 
his skill improved, so tliathe is able, more successfully, to 
avail himself of these qualities and relations. And it is 
also obvious, that this change in the external world has 
been produced by the physical and intellectual faculties of 
man ; that is, by human industry. The whole wealth of 
the world has been created by the union of human industry 
with the materials which God had originally spread around 
us. In simplest statement, we say then. 

Wealth is jproduced hy the application of labor to natural 
objects. ') 

\ {a) Some labor is necessary to find and appropriate most 
of those objects which nature brings forth spontaneously 
in a form to gratify desire. 

{h) In most cases further labor is requisite to bring 
natural objects into a condition fit for use. \ Pig leaves 
must be sewed together. Game and fish must be divided, 
cleansed and cooked. Wheat mast be <rronnd, and the 



18 PEODUCTION. 

flour kneaded and baked, and so on up to the transforma- 
tion of sand and sea-weed, — silex and alkali, into glass. 

(c) But most especially for the advanced processes of 
production essential to meet the wants of civilized society, 
some accwnulation of the products of former labor is requi- 
site to begin with. Materials must be gathered, instruments 
must be prepared and provision must be made for the sub- 
sistence of the laborer during the process of production. 
To these products of former labor, as concerned in pro- 
duction, the name Capital is applied. 

The Production of wealth thus involves the combina- 
tion of Labor with Capital, and this branch of the subject 
may be best studied under the threefold sub-division Labor 
— Capital — and the Co-operation of these two forces. 



CHAPTER IV. 



LABOR. 



Definition. — Labor is the voluntary exertion of human 
leings put forth to attain some desired object. 

We say " human beings, ^^ for the toil of beasts is but 
the agency of an instrument, reckoned a part of capital. 
We say '*' voluntary" exertion, for, in the view of Political 
Economy, the involuntary work of slaves is like the toil of 
oxen, the mere use of a thing owned as a part of one's 
capital. We say also '■^for a desired object," for this dis- 
tinguishes labor from play. In play, we are satisfied with 
the mere exercise of our faculties. In labor, we seek a 
further end — a result which comes as an abiding reward 
for the effort. The exertion put forth in play is often 
more severe than that of labor, as we see on the ball-ground 
or in th*e rowing match ; but the distinction is always clear. 
The game of a hired base-ball club is never, in any proper 
sense, play. 

Labor a Measure of Value. — Labor is always irlc- 
some, put forth only for the sake of the object to be attained. 
In any case, therefore, when desire is awakened for a cer- 
tain object, the question arises. Is the gratification worth 
the labor necessary to secure it ? When the desire is strong 
enough to overcome the man's inertia, or love of ease, he 
will put forth the necessary labor and that labor stands 
ever, an exponent of his estimate of the object. He will 
part with that object only for something else which has 
cost at least an equal amount of labor. Every man esti- 



20 PEODUOTION. 

mutes the products of his labor by the same rule. Thus, 
in all exchanges, for the comparison of value or purchasing 
power, the first question is, how much labor is involved — 
what is the cost of the objects offered for exchange ? Labor 
thus becomes not the sole element, but always a fundameu- 
tal and essential element in the measure of value. 

Kinds of Labor. — The processes of production give 
scope for the exercise of all the faculties of man. So, re- 
solving the compound of liuman nature into its two constit- 
uents, body and mind, we recognize two kinds of labor. 

1. Physical labor in which muscular exertion is the 
chief thing. 

2. Mental lalor which engages chiefly the faculties of 
the mind. 

We say " cMef" and " chiefly,''' because in reality all 
human industry combines some physical and some mental 
effort — taxes both muscles and brain. The dullest laborer 
m.ust give some thought to the movement of his hands ; 
and the profoundest thinker must task some of his muscles 
in the labor of writing or dictation to bring before the 
world the products of his brain-work. In general, manual 
labor is profitable in proportion as mental effort in the 
way of skill or contrivance, is blended with it. And minds 
tasked in study to unfold the secret constitution of nature, 
continually open the way for new industi'ies, and indicate 
new methods for the multiplication of wealth. These two 
kinds of labor are very closely joined in the active industry 
of the world. Yet the distinction is obvious and impor- 
tant. To bring it out more fully, we need carefully to 
consider : 

1,. What Physical Labor does. — All the power 
there is in these bodies of flesh, comes from the capacity 
of living muscle to contract and expand. It is simply 



PHYSICAL LABOR. 21 

power to produce motion. The muscles are strung with 
nerves through which the will directs their motions. All 
that man does or can do with matter is by working his 
muscles, to bring a pressure to bear on objects to set them 
in motion, or to check or modify, or altogether arrest their 
motion, so as to effect a desired result. Physical labor only 
moves things. But the power to do this gives man a com- 
mand, reaching beyond any definable limit, over the forces 
of nature which are the effective agents of production. 
Man drops a seed into the ground. Then the vital force 
hidden in the seed, quickened by moisture and heat and 
nourished by chemical elements in the soil, brings forth 
successively, root and blade and leaf and flower and fruit. 
Man brings coal to the furnace and applies to it a spark of 
fire. Then a hidden force of nature in the process of com- 
bustion turns the carbon into heat. Man may lay on the 
pile, ore dug from the earth, but it is nature's force, which by 
the action of heat makes the iron flow. Man's muscles lift 
the hammer, but nature's forces, gravitation and density 
on the one hand, and tenacity and malleability on the 
other make the blow effective to shape the iron. Thus, 
through all the processes of production, man moves things 
into such relations that the forces of nature can act to 
achieve the results he aims at. He can do nothing alone. 
Ordinarily, nature will do but little to his purpose without 
his effort to move things into some sort of adjustment to 
her laws. We are brought thus to consider next : 

2. What Mental Labor does directly for the pro- 
duction of wealth. For the wisest and most effective appli- 
cation of physical labor touching material objects just to 
move them, men must know as much as possible of the 
properties of matter and of the forces of nature by which 
those properties can be developed and modified. Such 
knowledge comes through labor of the mind, searching out 



23 PE0DUCTI02S". 

the constitution and the laws of matter. After this knowl- 
edge is gained, human minds must be further tasked to 
devise means and instruments for applying it in efforts for 
the increase of wealth. Still further, when the elements 
and laws of nature are understood, and instruments are 
made and adjusted to them, the mind must be exercised in 
close attention to superintend the operations, so as to hold 
all instruments and their movements true to the principles 
of their construction, and to the end aimed at. By habit- 
ual exercise, one acquires quickness of perception, and 
readiness and precision in manipulation, that is shill, which 
is, in essence, a power of mind more than of muscle. We 
define then three distinct forms in which mental labor is 
concerned in the production of wealth. 

1. The labor of Investigation and Discovery, through 
which the properties and laws of nature are made known. 
IvTewton labored in this department, when he discovered 
the laws of gravitation, of optics, and of the motions of 
the heavenly bodies ; Franklin, when he discovered the 
laws of electricity ; and Sir Humphrey Davy, when he 
discovered the alkaline bases, and the laws of their combi- 
nation. The labor of each of these men was also of the 
same kind, when they made known these laws to the pub- 
lic. The labor of students of science in all departments, 
belongs to this category. 

2. The labor of Invention, employed in devising instru- 
ments of production adjusted to the discovered principles 
and properties of nature. Newton performed this labor 
when he invented the telescope ; Had ley when by means 
of the quadrant, he applied the laws of light to the meas- 
urement of angles ; Watt when he devised an engine to 
control and utilize the expansive force of steam ; Arkwright 
when he invented the spinning-Jenny ; Morse when, by 
contriving the telegraphic register, he bound electricity to 
do man's bidding, and Daguerre when he found a way to 



me:^tal labor. 23 

apply the actinic properties of light, and set the sun him- 
self to making pictures for us. The mathematician in his 
study, puzzling his brain with problems of number and 
, quantity, lines and angles, seems far removed from the 
practical work of life. Yet the fruit of his labor enters 
into all efEective machinery, in a way to multiply comforts 
for men, beyond all computation. 

3. The labor of skillful Oversiglit and Superintendence. 
In its lowest form, this is joined immediately with the mus- 
cular action of physical labor, as in the case of the me- 
chanic using simple tools to work wood or metal, accord- 
ing to its nature, for a definite purpose. In higher forms 
it watches and guides the running of a complicated engine, 
or presides over a department of labor to combine the pro- 
ducts of many working hands and minds, or manages the 
business of a great manufactory, the observing eye and 
governing will by which manifold processes are made to 
coalesce for the one end of producing things that will grat- 
ify men's desires. Through the whole range, intelligence 
and judgynent are exercised to regulate the motions of 
physical labor, by means of inventions, and according to 
discoveries previously made. 

These three forms of mental labor continually run into 
each other, as Sir Humphrey Davy discovered the nature 
of choke-damp in mines, and invented the safety-lamp, or 
as Sir Richard Arkwright, a thoughtful spinner, invented 
the spinning machinery now in common use. It is obvious 
therefore, that the wide diffusion of knowledge, and the 
culture of habits of close observation, tends directly to in- 
crease the effectiveness of labor. In the actual progress 
of industry, the order of these forms of labor is commonly 
reversed. Men begin with simple muscular efforts. 
Thinking mind attending these efforts, invents means of 
easing labor or of increasing its effectiveness. The effort 
of invention leads to the discovery of properties and laws 



24 PRODucTioisr. 

which, in turn, wakens new interest and leads to new inven- 
tions. The spring of advancing civilization is thus the 
activity of the human mind directed to the production of 
wealth. 

Lator indirectly instrumental in Production. — Under 
this head, we refer to that labor, chiefly mental, which has 
to do, not with the immediate production of material 
objects, but with the general conditions most favorable to 
successful industry of whatever kind. Health, intelligence, 
cheerfulness, integrity, social order, security to property, 
good government, refined manners, high-toned moral and 
religious sentiments — all these are conditions on which de- 
pend, in no small degree, the results of labor for the actual 
production of wealth. This labor is applied immediately 
to human beings, to rear them so as to keep up the supply 
of laborers, and to give them physical vigor and spiritual 
capacity and energy ; and also to human society, to main- 
tain order and security, and a tone of sentiment most 
favorable to cheerful toil and to good-will and happiness 
in all the associations of life. To this class of labor are 
referred the mother's unwearying care and effort in nurs- 
ing and training children, the services of the j-^A^/siciaw, 
who studies and applies to individuals and to communities 
the laws of health, and the labors of the teacher, which de- 
velop the mental poivers of the young and diffuse in a com- 
munity intelligence which quickens and guides all industry. 
Here too, belong the busy brain- work of the lawyer, who 
labors to define and maintain rights and obligations as they 
spring up in the intercourse of men with one another, 
under the rule of civil law ; and that of the minister of 
religion who plies the truths and precepts of "the higher 
law" of God, to form good consciences and improve the 
public moral sense ; and that also of legislators and officers 
of government, on whose ordinances and administration of 
affairs, the stability of the whole structure of society 



PEODUCTIVE AND UN^PRODUCTIVE LABOR. 25 

depends. It is quite obvious that all these labors, though 
they do not directly bring forth material products, never- 
theless enter into the general productive industry of a peo- 
ple, and are as essential to the best results of its processes as 
the manual labor of the farmer or the blacksmith. The 
support and the rewards of this kind of labor must come 
from the wealth produced. And it is wise economy to 
make ample provision for these services to be rendered by 
persons who make them their study and profession. 

Labor as Productive and Unproductive. — Many writers 
on political economy make much of this distinction. Mr. 
Mill understands by *' productive labor, only those kinds 
of exertion which produce utilities embodied in material 
objects," and by unproductive labor, that " which does not 
terminate in the creation of material wealth." We are 
however disposed to discard this distinction and to substi- 
tute for it that of labor as directly or indirectly concerned 
in production, according to the views just presented. In 
his own presentation of the matter, Mill's definition breaks 
down when he tries to include in productive labor, the 
labor of officers of government, recognizing it to be " in- 
dispensable to the prosperity of industry." The same thing 
certainly must be said of all that has been referred to as 
'' labor indirectly instrumental in production." Whatever 
efforts tend to improve the condition of men for the work 
they undertake, or to improve the condition of society for 
securing to men the reward of their toil and the healthful 
enjoyment of life ought to be reckoned as Productive Labor. 
Then for the other side of the distinction, we may recog- 
nize in every community a class of non-producers — persons 
who do nothing directly or indirectly to increase wealth or 
promote the welfare of mankind, who are at best only con- 
sumers of the products of other men's labors. We have to 
recognize also a class of Destructives, persons whose ener- 
gies are put forth to hinder all productive industry and 
2 



26 PRODUCTION. 

destroy its fruits. Here must be included those who pan- 
der to the vices that unfit men for effective labor, those 
who as thieves, burglars, counterfeiters and swindlers, task 
muscles and brains, by force or knavery to rob their fellow- 
men, and the whole race of gamblers and speculators, 
whether their operations be carried on at the faro-table, or 
the pool-room, or the board of trade, or the stock-exchange. 
This whole class not only add nothing to the sum of wealth 
produced, but positively reduce it, by unfitting mfen for 
useful service and by unsettling the basis of industry, 
making its results uncertain. 

Changes effected by Labor. — We have seen that 
wealth is produced by the application of labor to existing 
natural objects. No human effort can create a particle of 
matter. All that it can do is to effect changes in the mat- 
ter to which it is applied. For the production of wealth, 
labor is directed to develop the utilities which are embodied 
in the constitution of material things so that they can be 
available for the gratification of desire. We have already 
shown that strictly speaking, labor can do no more than to 
move things. But throiigh the exertion of his mental fac- 
ulties in discovery and invention man gains control of the 
forces of nature, by or in accordance with which, most of 
the desired changes are wrought. Here, we may in a gen- 
eral way speak of labor as working by and with the forces 
of nature to multiply useful things which can he appropria- 
ted and exchanged, that is wealth. 

Now, the changes which may be produced in the ob- 
jects of nature may all be reduced to three, and concisely 
stated in the alliteration of three significant words, viz. 
Transmutation — Transformation — Transporta- 
tion. 

1. Transmutation. — Man may change i57ie e/e^wen^ar^/ 
form of matter. The farmer by means of seed, manure 



CHANGES EFFECTED BY LABOR. ' 27 

and cultivation, aided by the agencies of the sun and the 
earth, of rain, and the atmosphere, transforms the elemen- 
tary forms of carbon, gases, and water, into wheat. The 
•chemist changes the elementary forms of acids and alka- 
lies into salts. The dyer changes the elementary forms of 
iron and tannin into coloring matter ; and the case is the 
same with various other forms of human occupation. 

2. Transformation. — Man may change the aggregate 
form of matter. Tlie cabinet-maker changes the form of 
a board into that of a desk or a table ; the smith, a piece 
of iron into a horse-shoe or a nail ; the mason changes a 
pile of bricks and mortar into a wall ; the cotton spinner, 
a bale of cotton into thread ; the weaver, this thread into 
cloth. And, in general, the labor of mechanics and vfian- 
ufacturers is employed in effecting changes in the aggre- 
gate forms of matter. 

3. Transportation. — Man may change the place of 
matter. Thus, the shipmaster transports a cargo of cot- 
ton from New York to Liverpool, and brings back a cargo 
of cotton goods, of crockery, or of hardware. The team- 
ster receives a wagon load of merchandise in one town and 
transports it to another. The owner of a canal boat re- 
ceives manufactured goods in Albany, transports them to 
Buffalo, and brings back to Albany, in return, a freight 
of agricultural produce. The agent of a railroad receives 
a hundred boxes of merchandise in Manchester, and trans- 
ports them to Liverpool. And thus, also, a large number 
of the inhabitants of every populous town derive their sub- 
sistence, and frequently grow rich, simply by transporting 
wares and merchandise from one part of the town to another. 

These divisions, in general, correspond with the agri- 
cultural, mechanical, and commercial departments of hu- 
man industry. We have adopted a different terminology, 
because it seems to form a more- generic and better limited 



28 * PRODUCTION. 

division, and one more conformable to the facts in the 
case. 

1. Concerning these divisions, it is proper to remark, 
that, though these are the various objects of human indus- 
try, yet it frequently happens that, he who labors in one, 
is also obliged to labor in one or both of the others. Thus, 
the farmer who raises a crop, is obliged to transport the 
seed to the field, and frequently to transport his harvest to 

-market. The cabinet-maker who manufactures a table, 
may transport his materials from the lumber yard. The 
engineer, on the railroad, is obliged to change the elemen- 
tary form of wood, in order to produce the caloric, neces- 
sary to move his locomotive. We designate' the class of 
laborers to which a man belongs, by the ultimate object 
which he has in view in exercising his profession. 

2. Each one of these forms of industry is equally im- 
portant in developing the utility of substances, that is, in 
giving them capacity to gratify human desire. Thus we 
see that the ore in the mine has no power to gratify desire, 
until it is made into iron or steel. The steel is worthless 
for the purpose of cutting, until it is transformed into a 
knife, an axe, or some cutting instrupent ; and, if I want 
to make a pen in New York, a knife is utterly useless to 
me for this purpose, while it remains in Sheffield or Liv- 
erpool. Unless these several utilities are all conferred up- 
on it, it would be of no service to me. Hence, in purchas- 
ing a knife, I pay for them all, and as willingly for one as 
the other. 

3. Hence we see how incorrect is the notion sometimes 
advanced, that all loealth is the production of one or of two, 
and not of all these forms of human industry. All these 
changes must be effected in almost every article which we 
consume, and if either of them were to be suspended, our 
desires would not be gratified, and the other two must also 
be discontinued. He who transports flour, performs an 



CHANGES EFFECTED BT LABOR. 29 

act of as essential importance to the sustentation of the 
human race, as he who raises wheat. He who brings a 
knife from Liverpool to me, performs a labor as important 
to me, as he who manufactures the knife ; for, if it were 
three thousand miles off, it might, for all the purposes for 
which I want itj as well not be in existence. And yet 
more, if one of these forms of labor should cease, the others 
must soon cease with it. Of what use would wheat or wool 
be to the farmer, if they could not be transported from his 
farm ? And again : what gain could be derived from 
either, if there were no means of grinding the one, or of 
manufacturing the other ? Hence we see that all the forms 
of industry mutually support, and are supported hy, each 
other ; and hence, also, we see that any jealousy between 
different classes of producers, or any desire on the one part, 
to obtain special advantages over the other, are unwise, 
and, in the end, self-destructive. The fact is, that if left 
to themselves, they all flourish, and they all suffer together. 
Nor can either one be depressed, for any considerable 
period, without injuriously affecting both the others. 

These various forms of human labor enter, in different 
degrees, into the value of different articles of use. -For in- 
stance, butchers' meat and green vegetables derive almost 
their whole value from the first hiiid of labor, as they re- 
quire very little modification, and will bear but short trans- 
portation. On the contrary, salted provisions may derive 
a large portion of their value from chatige of place. Cloth- 
ing, cutlery, and what are commonly denominated manu- 
factures, derive the greater portion of their value from 
change in the aggregate form. The original material con- 
stitutes, in general, but a small part of their price, and, 
not being of great bulk, their transportation is not very 
expensive. The steel that would make a pair of razors, 
and the cost of transporting them from Sheffield or Paris 
to New York would form but a very small portion of their 



30 PKODUCTION. 

price. On the contrary, bulky articles, such as coal and 
iron, derive a very large portion of their cost from trans- 
portation. Coal, that has but little value in the coal mines 
of Pennsylvania, is sold for six or eight dollars a ton in 
Chicago. And all the labor employed upon it, is that 
which is necessary for breaking it in pieces, and removing 
it from its bed to the house of the consumer. 

As, however, the human race is scattered over the face 
of the globe, and as their wants in all latitudes are so 
nearly the same, while no country affords facilities for 
supplying more than a very small number of these 
wants, it is evident that the labor employed in change of 
place must, in civilized countries, be most universal, 
and must enter essentially into the greatest number of 
commodities. Of this every one will be convinced who 
will take any article of dress, of furniture or of food, and 
consider the amount of transportation that has entered into 
its production ; and, especially, if he take into account the 
transportation which has entered into the formation of the 
instruments by which it had been produced. The same 
truth is also illustrated by the fact, that whole nations, 
with very small natural advantages, as Holland and Venice, 
have, in a short period, become immensely rich, merely by 
conferring change of place on the merchandise and pro- 
ductions used by other nations. Water communication, in 
the early stages of society, greatly diminishes the cost of 
transportation, and, of coui'se, increases the facilities of 
exchange. It is on this account that the first settlements 
of nations are always either on the shores of the ocean, or 
along the banks of navigable rivers. 

It may also be worthy of remark that, thus far in the 
progress of society, the ingenuity of man has been more suc- 
cessful in devising means for increasing the productiveness 
of labor in the second and third, than in the first kind of 
numan industry. Improved agricultural utensils, a better 



CHANGES EFFECTED BY LABOK. 31 

knowledge of the nature of soils, and of the diJfferent kinds 
of grain and edible vegetables, and of manures have added 
considerably to the quantity of product that can be raised 
by a given amount of labor. But this increase is small in 
proportion to that effected by the use of machinery in the 
case of the cotton manufacturer, and by the use of the 
locomotive and many other forces. It is, doubtless, wisely 
ordered that it should be so. Agricultural labor is the 
most healthy employment, and is attended by the fewest 
temptations. It has, therefore, seemed to be the will of 
the Creator, that a large portion of the human race should 
always be thus employed, and that, whatever effects may 
result from social improvement, the proportion of men 
required for tilling the earth should never be very greatly 
diminished. It is also to be remarked, that division of 
labor, which so greatly increases the productiveness of 
human industry in the other modes of production, can be 
applied but in a small degree to agriculture. No man can 
devote himself exclusively to ploughing, sowing or reap- 
ing ; because only a small part of the year can be employed 
in either of these occupations. The farmer, must, there- 
fore, practise them all, at different times ; and, of course, 
every farmer must be able to perform not one, but all the 
several operations required in his trade. This forms 
another reason why the increase of productiveness of 
human industry, in this department of labor, has not kept 
pace with that which has been witnessed in manufactures 
and commerce. 



CHAPTER V. 

MEANS FOR INCREASING THE EFFECTIVENESS 
OF HUMAN LABOR. 

The physical power of man is extremely limited. His 
strength is soon exhausted. His limbs and muscles un- 
assisted, are insufficient to meet his simplest wants. He 
needs shelter, cooked food, and clothing. But he could 
not, with his teeth and nails, cut down a tree and fashion 
it into a cabin. He cannot, by his hands, either cook his 
food, or manufacture a fabric suitable for clothing. All 
these can, however, be done by other agents which he can 
command and control. Thus, iron can be made to cut 
down and fashion a tree, fire to cook his food, and a spin- 
ning wheel and loom can be made to furnish him with 
clothing. 

As mankind multiply and are bound together in society. 
Individuals are found to differ in capacity. One has spe- 
cial endowments for one kind of labor, another for another. 
Hence there naturally springs up some systematic arrange- 
ment for mutual cooperation to increase the productiveness 
of the community, by assigning to each the labor for which 
he is best fitted, and giving all something to do. 

Two means by which the effectiveness of human labor 
is increased, are thus indicated. They are The Use of 
Natural Agents, and The Division of Lalor. 

1. Natural Agents. — A natural agent, is any qual- 
ity or relation of things which can be used for the purpose 



IS^ATUEAL AGENTS. 33 

of assisting us in production. Thus, the hght and heat of 
the sun are natural agents, without the aid of which we 
could not create vegetable products. Caloric or artificial 
heat, is a natural agent, without which we could neither 
cook our food, prolong our lives in cold climates, give any- 
valuable quality to metals, nor create steam for the pur- 
pose of machinery. Magnetism is a natural agent, by 
which we are enabled, in any part of the earth, to know in 
what direction we are moving. The various powers and 
instincts of animals are natural agents, by which we accom- 
plish purposes which could not be accomplished without 
them. Thus, the farmer avails himself of the muscular 
power and docility of the ox and the horse ; the huntsman, 
of the fleetness and scent of the hound, etc. Wind, the 
gravitating power of water, and steam, are natural agents, 
by which we create the momentum necessary to various 
operations in the arts. 

A tool, or a machine, is any combination of matter, by 
means of which we are enabled to avail ourselves of the 
qualities or relations of a natural agent. Thus, a lens 
or burning glass, is a tool, by means of which we concen- 
trate, for useful purposes, the I'ays of the sun. 

A stove, or a fire place, is an instrument, or tool, by 
which we avail ourselves of the calorific properties of fuel. 

A mariner's comjMss is a tool, by which we avail our- 
selves of the peculiar quality of the magnetic needle. 

A water wheel is a tool, by means of which we avail 
ourselves of the gravitating power of water. 

A steam engine is a tool, by means of which we avail 
ourselves of the expansive power of steam. 

The only difference between a tool and a machine is, 
that the one is more com.plicated than the other. A com- 
mon hammer is a tool, by means of which we avail our- 
selves of the gravity and density of iron, and of the power 
of the lever. . A trip-hammer^ by which large masses of 
3* 



34 PRODUCTION. 

iron are fashioned and wrought, is called a machine, but 
the principles employed are, in both cases, the same, only 
the trip-hammer is moved by a natural agent, water, or 
steam, while the common hammer is moved by the hand. 

The qualities and relations of natural agents are the gift 
of God, and, being His gift, they cost us nothing. Thus, 
in order to avail ourselves of the momentum produced by 
a water-fall, we have only to construct the water-wheel and 
its necessary appendages, and place them in a proper posi- 
tion. We then have the use of the falling water, without 
further expense. As, therefore, our only outlay is the cost 
of the instrument by which the natural agent is rendered 
available, this is the only expenditure which demands the 
attention of the political economist. 

If we reflect upon the various natural agents employed 
by man, we shall see that some of them can be used with- 
out any tools whatever. Such is the case in agricultural 
labor, with air, and the light of the sun. Others require 
only so simple instruments, that their effect upon price is 
not appreciable. Thus, a mariner's compass, which would 
last for twenty years, and assist in the transportation of 
half as many millions' value of merchandise, would cost 
but a few dollars. Others are used by few persons, and 
for particular and unusual purposes, as the lens, or the mi- 
croscope. It is only those agents which require for their 
employment, machinery of which the cost is appreciable, 
and which are of so general necessity, that their use enters 
into consideration in estimating the expenses of produc- 
tion, that require to be specially noticed in Political 
Economy. 

The means most universally required for creating 
change, is momentum, or, as it is commonly called, power. 
Without this, in agriculture, no change in elementary 
form, and, in mechanics, no change in aggregate form, and 
in transportation, no change in place, can be effected. 



]S"ATUEAL AGENTS. 35 

The natural agents connected with the use of momen- 
tum, may be divided into two classes : 

1. Those which create momentum. 

2. Those which direct it. 

1. Of those -which create Momentum, we have 
two kinds : Animate, and Inanimate. 

1. Animate. These are, beasts of draft and burden, 
generally. The most common of these are, tlie ox, the 
horse, and the mule ; others in use in particular districts, 
are the camel, the elephant, the dog and the reindeer. 

The subjection of animals to the human will, marks an 
era in the progress of civilization ; and teaches us that the 
first important step has been taken in the improvement of 
the condition of man, and of the productiveness of human 
industry. The ox and the horse have much greater physi- 
cal power than man. They may also be sustained at a 
much less expense. Their food is the spontaneous produc- 
tion of the earth, which, for a large part of the year, they 
gather for themselves, and which requires no labor of 
preparation. They need no clothing in any latitude, and 
in the warmer parts of the temperate zone, need no shel- 
ter. But, in consequence of his superiority in intellectual 
endowment, man can direct and govern the physical power 
of several of these animals, and, by attaching them to agri- 
cultural machines, can command that power at his will. 
If, then, by the use of animals, one man can wield a physi- 
cal force equal to that of ten men, he will be able to pro- 
duce, by the labor of a day, ten times as much as he could 
before the introduction of animate agents. He will, there- 
fore, by the same amount of labor, produce ten times as 
large an amount of objects of desire ; that is, of means of 
human happiness. 

In the earliest stages of society, animate power must be 
used for the production of momentum, in all the three de- 



36 PRODUCTION. 

partments of liumau industry. In the labors of agricul- 
ture, it is still employed, and must probably be thus em- 
ployed forever. Nothing has yet superseded it, and there 
is reason to doubt whether any thing ever will to any great 
extent supersede it. The improvements that have been 
made by the introduction of other creative forces, have for 
the most part, been connected with the other modes of 
operative industry. 

2. Of Inanimate Natural Agents. The inanimate 
agents, most commonly in use, are : The ex^jlosive force 
of Gunpoivder, Dynamite, etc. ; Wind ; The gravitating 
power of Water ; and The expansive power of Steam. 

1. Gunpoioder is used in the blasting of rocks, in hunt- 
ing, and in war. Its value, in the blasting of rocks, is very 
considerable. By drilling a small hole, which may be done 
by one man in a day, and by the use of a few ounces of gun- 
powder, a force may be exerted, in an instant, producing 
an effect which twenty men, for several days, could not 
otherwise have exerted. Hence, it is of very great use in 
all works of internal improvement, where rocks must be 
removed, in order to admit the passage of railroads and 
canals. In fact, it is doubtful whether many of the most 
important of these works could ever have been executed, 
but for this agent. Others, if the execution of them were 
possible, must have been accomplished at so great an ex- 
pense, that the investment of capital in them would not 
have been profitable, and, of course, it would not have been 
made. Nitro-glycerine, a recent invention, has greater ex- 
plosive force than gunpowder and in the form of dynamite 
and other preparations is now commonly substituted for it 
in heavy blasting. 

Gunpowder is also used extensively in war. If war be 
beneficial, or even necessary, gunpowder is an agent of the 
utmost importance ; for, by no other means yet discovered, 
is it possible to destroy so many men with so little physi- 



NATUKAL AGENTS. 37 

cal suffering, and with so little personal labor. It has also 
a moral advantage over other methods of slaughter, inas- 
much as the destruction of human life, in this manner, 
excites less sensibly the ferocity of the human heart. On 
this account, wars, since its introduction, have been con- 
ducted on more humane principles than formerly. It has 
also been a valuable auxiliary to the progress of civilization, 
since it has conferred on civilized, an undisputed mastery 
over uncivilized nations. There has not been, for centuries, 
any danger to Christendom from barbarian invasion. Be- 
sides, the more energetic are the means of destruction in 
war, the less is the loss of life in battle. Hence, of a given 
number of combatants in an engagement, a much smaller 
proportion is now slain than formerly. This might almost 
give rise to the paradoxical hope, that some means of de- 
struction might yet be invented, so overwhelming in its 
effects, as to put the smallest number of men on a level 
with the greatest, and hence to put an end to wars al- 
together. 

3. Wind is another agent used for the creation of mo- 
mentum. As a stationary agent it is an important me- 
chanical power, in countries destitute of water power, or 
of the fuel necessary for the production of steam, or of the 
capital which must be invested- in the machinery required 
■in the use of more expensive agents. Its principal advan- 
tage is its cheapness. It costs nothing to create it, and the 
machinery, by which it is applied, is simple, and easily 
constructed. 

The disadvantages of wind are its uncertainty, both in 
quantity and in time, and the diflBculty with which it is 
regulated. In consequence of the irregularity of its force, 
it is impossible to employ it in labor requiring delicacy of 
operation : and, in consequence of its tmcertainty in time, 
it could not be employed where the labor of many persons 
was dependent on its assistance. 



38 PEODUcTioiir. 

As a locomotive power on water, wind was until recently 
almost universally used in navigation. Though the dii-ec- 
tion in which it acts is variable, yet nautical skill enables 
us to use it when blowing from almost any point whatever. 
Its variation, in the quantity of force, is here also a matter 
of less consequence, since this circumstance can affect the 
operation to be performed only in respect to time. And 
variation, even in this respect, has in a great degree yielded 
to science and enterprise. It is astonishing to observe with 
what precision and certainty voyages were made by sail 
between New York and Liverpool. But with the inven- 
tions of Fulton a new era commenced. Steam very soon 
was employed in the place of wind in the navigation of 
rivers and along the seaboard. It was not, however, until 
the year 1837 that the experiment was successfully made, 
of establishing a regular communication between Europe 
and America by means of steam. In May of that year, the 
steamers Sirius and Great Western, the former from Liver- 
pool, the latter from Bristol, arrived in New York. Since 
that time passages have continued to be made between the 
above ports with great regularity, and thus far witli few 
disasters. It is demonstrated that the navigation of the : 
Atlantic, by steam, is as perfectly within the power of man, 
as the navigation of the Thames or the Hudson. 

3. The gravitating power of Water is another agent em- 
ployed for the creation of momentum. This is used only 
as a stationary agent. Its advantages are that it is cheap, 
tolerably constant, and frequently is capable of exerting 
great mechanical force. Its disadvantages are, that it is 
stationary ; that is, that it can be used only in situations 
where it has been created by nature. Hence, it is fre- 
quently at a considerable distance from the seaports whence 
the manufacturer derives his supplies, and whence he ex- 
ports his products. In such cases, the cost of transporta- 
tion must be deducted from the profits of the establish- 



INANIMATE AGENTS. 39 

ment, and is of course, to this amount, a diminution of 
the profits. 

Water cannot always be commanded in sufficient quan- 
tity. Very few mill-seats are secure from the liability to 
suffer from the want of water. This is a great inconveni- 
ence, inasmuch as, in seasons of drought, a large number 
of the laborers must be unemployed, and a large portion 
of the expenses of the establishment must be incurred, 
without yielding any remuneration to the proprietor. 

Another disadvantage of water power is, that it is lia- 
ble to danger from inundation. Though this may be 
guarded against in many cases, yet it frequently can be 
done only at an expense which greatly reduces the cheap- 
ness of the agent. Notwithstanding these disadvantages, 
water power will probably be always used, where great 
mechanical force is required ; where the machinery to be 
employed is simple, and where the operation does not re- 
quire the greatest possible nicety of execution. Eecent 
inventions, however, have greatly improved the steadiness 
of this power and men's control of its action. 

4. Steam is the power, however, most commonly in 
use at present. Its advantages are, that it can be used to 
create any required degree of mechanical force ; that it is 
perfectly under human control ; that it may be created in 
any place where fuel can be obtained ; that it can be used 
at will, either as a stationary, or a locomotive power ; and 
that it can be made to act with perfect regularity. Its 
only disadvantage is its txpensiveness. The machinery by 
which it is generated is costly, and requires frequent 
repairs ; and the fuel, by which it is maintained, is a very 
serious item of consumption. The price of engines, how- 
ever, has been much reduced, as the demand for them has 
increased. And by improvement in their construction, 
the consumption of fuel h'as been greatly diminished, 
while increased facilities for transportation have mate- 



40 PRODUCTION. 

rially reduced its price. The introduction of steam 
power greatly reduced the price of fuel in Great Britain, 
until the rapid consumption threatened to exhaust her 
stores. 

The question whether steam or water power should be 
used in any particular case, is commonly to be decided by 
their relative expensiveness. This will be decided, princi- 
pally, by the place in which the power may be required. 
Water power will generally be the cheaper where it can be 
procured in abundance, and sufficiently near to a market 
or to tide water. But where it is variable in quantity, or 
is at a considerable distance from the place of delivery, the 
cost of transportation will frequently overbalance its other 
advantages, and render steam power the more economical. 
Machinery, propelled by steam, can be erected and carried 
on upon a wharf, or in the midst of a city ; and hence it 
avoids all the cost of unnecessary transportation. Ma- 
chinery propelled by water power can be erected only at 
the place where the water power exists, and of course, is 
subject to all the expense of transportation between that 
place and the market. 

The ADVANTAGES of inanimate over animate natural 
agents, are several. 

1. Inanimate agents can, within a small compass, and 
with comparatively little weight, produce a vastly greater 
amount of momentum, than animate agents. Thus, a 
steam engine, of one hundred and fifty or two hundred 
horse power, occupies but a small space, and forms but a 
small part of the cargo of a vessel. But so great a num- 
ber of horses could scarcely be carried in any vessel de- 
signed to transport either freight or passengers ; and 
besides, no mechanical arrangement has yet been devised, 
by which such a number of animals could conveniently be 
employed upon one operation. 



ANIMATE AND INANIMATE AGENTS. 41 

2. They are continuous ; that is, they are never liable 
to fatigue, and never need rest. Animals must spend the 
greater part of their time in feeding or in repose. Espe- 
cially is this the case, if they are worked rapidly. During 
this time, the labor which they perform must either be 
suspended, or else other animals must take their place. 
A horse cannot labor severely for more than eight hours in 
twenty-four. Hence, if the uninterrupted labor of horses 
were required for twenty-four hours, three relays must be 
provided. Thus, if a boat were required to perform a 
voyage in twenty-four hours, she must employ three relays 
of horses ; that is, a steamboat, worked by a power equal 
to that of one hundred and fifty horses, would requii-e four 
hundred and fifty horses, in order to create the necessary 
momentum. 

3. Hence, there is a great gain in Economy. The first 
cost of inanimate is generally less than that of animate 
agents ; they are liable to no diseases ; they require no 
food ; and create expense only while they are performing 
their work. Were the labor now performed by steam, to 
be performed by horses, the price of the ordinary necessa- 
ries of life would be quadrupled, and many articles of ordi- 
nary use would be placed out of the reach of any but the 
most opulent. Nor is this all. The substitution of inani- 
mate for animate power has a great tendency to reduce the 
cost or to increase the supply of all agricultural products. 
Suppose that, by the use of steam, one thousand horses 
can be dispensed with. A horse requires for sustenance, 
throughout the year, as much agricultural produce as 
would support eight men. If, then, these one thousand 
horses can be dispensed with, there may be produced, on 
the land which was formerly employed for the production 
of hay, as much wheat as will support eight thousand men. 
This must, at first, reduce the price of wheat ; and the 



42 PR0DUCTI01S-. 

result would be, that the district would support eight thou- 
sand more men than before.* 

4. There is also, commonly, a gain in personal safety. 
Inanimate agents act under laws which may be known and 
obeyed, and of which the results may be commonly foreseen 
and guarded against. A.nimals are endowed with passipns 
and will, which we can frequently neither control nor in- 
fluence. Besides, the greater expensiveness of the individ- 
ual machines employed in the use of inanimate agents, 
renders it for the interest of the proprietor to employ men 
of experience and responsibility to manage them. This 
very sensibly diminishes the risk. When we reflect upon 
the vast amount of travelling by steamboats and railroads, 
it must be evident that, notwithstanding the accidents to 
which they are liable, a vastly greater amount of human 
life would be sacrificed, if the same number of persons 
were transported by horses. 

5. Inanimate agents can be used without the infliction 
of pain. Inanimate agents are insensible. Where the 
labor to be accomplished is either severe, or where it 
requires great speed, animals must be rapidly destroyed. 
This exposes them to great suffering. A horse in a stage 
coach can rarely travel rapidly, more than ten miles a day ; 
and most horses will endure even this labor but for a short 
time. From this suffering, inanimate power is exempt. 
It never endures pain from being over driven. 

6. Animate power decreases with velocity. Hence, we 
must soon arrive at a point beyond which it can no further 
be used to create momentum. If we represent the trac- 
tive force of a horse, when moving at two miles an hour, 
at one hundred, his force at the rate of three miles, will be 

* These statements are allowed to stand as written by Dr. 
Wayland. But experience has shown that the use of steam has, by 
the stimulus given to industry, caused an increase rather than a dim- 
inution of tUe number of horses kept. C. 



AGENTS POR DIRECTING MOMENTUM. 43 

eighty-one ; at the rate of four miles, sixty-four ; at the 
rate of five miles, forty- nine ; at the rate of six miles, 
thirty-six ; while at the top of his speed, he can carty 
nothing more than his own weight. An engine, on the 
contrary, may be made to work within certain limits, as 
powerfully at one degree of velocity as at another. In all 
cases, therefore, in which both great power and great 
velocity are required, inanimate power must, of necessity, 
be employed. 

From these causes, we see that inanimate is rapidly tak- 
ing the place of animate power, both where stationary and 
"v^here locomotive force is required. By the additional 
speed which it is capable of producing, it gives rise to great 
economy of Hone. This, to all persons engaged in active 
employments, is a consideration of vast moment, v Being a 
continuous agent, it is also enabled to act with the great- 
est certainty. Hence, men may adjust their transactions, 
in different places, with entire precision. This is also 
another source of economy, both of time and of capital. 
And, besides, notwithstanding the expensiveness of the ar- 
rangements for the use of locomotive forces, the amount 
of additional travelling to which they give rise, is so great 
that the expensiveness of transportation between different 
places is, in general, materially diminished. 

Of the Natural Agents by which Momentum 
is directed and applied. — It is obvious that a great 
addition is made to human power, where the agents for 
creating momentum have been discovered. But this is not 
all. Several combinations of matter may be formed, by 
which mere human force may be greatly assisted, and 
which, by being united with the agents for creating mo- 
mentum, may greatly increase and vary and give adapta- 
tion to its utility. These are called Meclianical poioers, 
which are treated of at large in works on Mechanics and , 



44 PRODUCTION^. 

Natural Philosophy. In their simple form, they are the 
lever, the wheel and axle, the inclined plane, the scretv, the 
pulley, and the toedge. They are variously combined for 
producing the different results of mechanics, but may be 
all reduced to these simple elements. 

By means of these, the muscular power of man is en- 
abled greatly to increase its effect ; that is, a man by his 
own strength can now accomplish labor which he could not 
accomplish without them. Though these instruments give 
no new strength, yet they greatly increase the effectiveness 
of that which already exists ; and hence, their invention 
marks an important era in the progress of civilization. It 
is also to be remarked that their origin, in point of time, 
is far in advance of the discovery of the creative agents. 
Archimedes had made great progress in the discovery and 
application of these modifying powers when the use of crea- 
tive agents was almost unknown. 

The triumph of human skill is, however, achieved when 
these two forms of natural agency are combined in a single 
machine. By the one we generate power to what extent 
soever we choose ; and by the other we modify it in any 
form, give to it any application, and direct it to any pur- 
pose that our convenience may require. It is in this man- 
ner that man renders all the various powers of nature 
tributary to himself. He can thus create and use as he 
pleases as great a power as he desires. He devolves the 
labor on nature, and he has only to fabricate the instru- 
ments and give them their direction. He is successful just 
in proportion as he does this ; since nature always works 
with nndeviating accuracy, with unerring skill, with inde- 
fatigable perseverance ; and she always works for nothing. 

It may be useful to specify some of the results accom- 
plished by the various instruments which man employs for 
modifying that momentum which is exerted by the first 
n class of natural agents. 



AGENTS FOR KIRECTING MOMENTUM/* 45 

1. We are thus enabled to change the direction of the 
power. Thus, in the cylinder of the steam engine, the 
momentum is created either in perpendicular or horizontal 
strokes. This, being by means of an arm and a crank 
changed into a circular motion, moves the paddle-wheels 
of a steamboat. Thus, also, in the machinery for moving 
a trip-hammer, a circular is changed into a perpendicular 
motion, by the striking of the cogs of a wheel upon the 
short arm of the lever, while the hammer is attached to the 
other arm, 

2. y^QexohAn^Q power for velocity. This is done in all 
spinning machinery. By water or by steam, we cause a 
large wheel to revolve ten, twenty, or thirty times in a 
minute, and with a power equal to that which could be 
produced by fifty or one hundred horses. In spinning, 
however, we need small power but great velocity. Hence, 
by the combination of various large and small wheels we 
produce a velocity, in a thousand spindles, equal to many 
thousand revolutions in a minute. The whole of this fifty 
or one hundred horse power is thus spread over a large 
manufactory, and adapted by various contrivances to every 
degree of velocity and every form of motion that may be 
required. 

3. We are thus enabled to exert forces too great for 
animate -power. By water power or by steam we can gen- 
erate as great a force as we please ; and we have only to 
combine with it the proper adjustments, in order to exert 
upon any point any momentum which we desire. The 
power required to roll and hammer iron or copper, to pro- 
pel steamboats, to forge anchors, and that used in several 
other of the arts, is greater than could be exerted by any 
animate force with which we are acquainted, unless it were 
exerted by means of some combination of the mechanical 
forces. 

4. We are thus also enabled to execute operations too ^ 
delicate for human touch. Very delicate operations soon 



46 ♦ PRODUCTION'. 

weary the nervous system by the excessive attention which 
they of necessity require. Thus, in order to spin the finest 
thread on a spinning wheel there must be great accuracy, 
both in the velocity of the wheel and in the muscular power 
exerted in drawing out the thread. This requires an eifort 
of attention which the human system cannot long maintain, 
and of course, the thread will frequently be uneven. But 
by means of machinery both of these operations may be ad- 
justed with mathematical accuracy ; and as machines have 
no nerves, they will be perfectly faithful to that adjustment. 
Hence machinery is necessarily used in the manufacture of 
such articles as require for their formation identity of re- 
sult, such as screws, types, etc. Nevertheless it is a singu- 
lar fact that no fabrics have yet been produced by machin- 
ery equal to the Belgian lace or the India shawls wrought 
by hand. Careful training and hereditary knack, cultivated 
through many generations, enable human nerves and mus- 
cles to bring forth the most delicate and perfect products of 
labor and skill, though at an immense expenditure of labor. 

5. By means of machinery, we are enabled to accumu- 
late power. We thus exchange a continuous and small 
force for a sudden and violent one. Such is the case with 
the pile-driver, and the common beetle or mallet, when 
used in combination with the wedge. 

6. By the same means we are enabled to exchange a 
short and irregular effort for a continuous and regular move- 
ment, or to spr§ad the action of a short, over a long period 
of time. This is done in clocks, watches, and other similar 
machinery. Here we spread the action of a minute over a 
day, or a week, and with almost mathematical accuracy. 

In consequence of the above mentioned application of 
machinery, various other advantages are realized in pro- 
duction. For instance ; there is frequently a great saving 
of material, as in the change from making boards with the 
adze, to that of making them with the saw ; and again the 
labor of natural agents is so much cheaper, that many arti- 



AGEXTS FOR DIRECTIiTG MOMENTUM. 4T 

cles, which would otherwise have been worthless, are now 
deserving of attention, as they may now be proiatably en- 
dowed with some form of value. 

We append to these remarks upon the use of natural 
agents an extract very graphically describing the power 
of the steam engine, which has commonly been ascribed to 
Lord Jeffrey, of Edinburgh : 

" It (the steam engine) has become a thing, stupendous alike 
for its force and its flexibility ; for the prodigious power which it 
can exert ; and the ease, precision, and ductility with which it 
can be varied, distributed, and applied. The trunk of an ele- 
phant, that can pick up a pin or rend an oak, is as nothing to it. 
It can engrave a seal, and crush masses of obdurate metal before 
it ; draw out, without breaking, a thread as fine as a gossamer ; 
and lift up a ship of war, like a bauble in the air. It can embroi- 
der muslin, and forge anchors ; cut steel into ribbons, and impel 
loaded vessels against the fury of the winds and waves. 

' ' It would be difficult to estimate the value of the benefits 
which these inventions have conferred upon the country. There 
is no branch of industry that has not been indebted to them, and 
in all the most material, they have net ciiiy widened most mag- 
nificently the field of its exertions, but multiplied, a thousand 
fold, the amount of its productions. It is our improved steam 
engine, that has fought the battles of Europe, and exalted and 
sustained, through the late tremendous contest, the political great- 
ness of our land. It is the same great power, which enables us to 
pay our national debt, and to maintain the arduous struggle in 
which we are still engaged, with the skill and capital of countries 
less oppressed with taxation. 

"But these are poor and narrow views of its importance. It 
has increased, indefinitely, the mass of human comforts and enjoy- 
ments, and rendered cheap and accessible, all over the world, the 
materials of wealth and prosperity. It has armed the feeble hand 
of man, in short, with a power to which no limits can be assigned ; 
completed the dominion of mind over the most refractory quali- 
ties of matter ; and laid a sure foundation for all those future 
miracles of mechanical power, which are to aid and reward the 
iabors of after generations." 



CHAPTER VI. 

DIVISION" OF LABOR. 

The effectiveness of labor is increased by systematizing 
its operations. The principle is that different hinds of 
labor he distributed to different classes and individuals, so 
that' each shall do that for which he is best fitted. 

The principle comes out of that order of nature which 
has given to certain regions of the earth peculiar adapta- 
tions for certain productions and to certain individuals pe- 
culiar endowments for certain kinds of work ; and also 
from providential circumstances which have directed the 
efforts of different nations and classes and individuals, to 
specific forms of production. 

It is illustrated on a broad scale, in the different indus- 
tries of different nations, adapted to their respective advan- 
tages. It thus gives rise to the wide commerce of the 
world. It is illustrated also in all civilized communities, 
in the distribution of the various forms of service, trades 
and professions to different people, according to their seve- 
ral capacities, tastes and circumstances. It thus gives rise 
to the multifarious exchange of values in detail, which 
passes objects of desire from producers to consumers, and 
constitutes so large a part of the business of every civilized 
community. It is manifest that the results of productive 
labor are both increased and improved when the farmer 
and the baker, the blacksmith and the jeweler, the weaver 
and the tailor, the merchant, the lawyer, the doctor, etc., 



DIVISION OF LABOR. 49 

(Bach devotes his energies to the work of his particular 
calling. 

Some application of the principle is essential to the or- 
ganization of civilized society ; and civilization advances as 
this principle is carried out in minute details. The rami- 
fications of the principle are many and exceedingly intri- 
cate. For illustration, we may start with the loaf of bread 
on our table and trace out the various forms of labor 
directly or indirectly concerned in bringing it before us, 
fit for food. The loaf came to us from the baker, who 
received his flour from the miller, who in turn received- 
his grain from the farmer. This line of connection is sim- 
ple and direct. But if we step into the bakery, we see at 
once that many other forms of labor are involved in this 
product. The mason and the brick-maker and the lime- 
burner have all done something to build the oven ; the 
services of the carpenter, the blacksmith and the tinner, 
were necessary to form the few simple tools required ; 
another line of laborers were employed to cut or dig, to 
transport and to prepare the fuel ; others still were con- 
cerned in producing the salt, the yeast and the soda mixed 
with the chief ingredient ; and the tools and materials of 
each of these branches of labor required many other kinds 
of labor. We pass to the mill whence the flour came, and 
here we have to recognize besides the mJller and his im- 
mediate helpers, the various laborers Avho improved the 
water-power, built the mill, prepared the mill-stones, con- 
trived and framed the machinery, consisting of many 
parts, each involving diverse labor and skill, and those who 
made the barrels, and packed and transported the flour ; 
and in addition to these, are the many a little further off 
who furnished the instruments and materials for their varied 
work. We pass on to the farmer who raised the wheat, 
and with him pass before us all concerned in the culture 
and harvesting of his crop, all who had to do with clearing. 



50 PRODUCTIOlir. 

fencing and draining the fields, and all employed in tlie 
manufacture of his divers tools. Then, back of all these, 
was the seed-wheat and the complication of labor involved 
in its production ; and in each line of industry noticed, 
the ramifications run back indefinitely to the labor of 
many groups and successive generations of men. Who 
can reckon np all the different persons and forms of 
labor represented thus in the bread just ready to be 
eaten ? 

Contrast with this complicated division of civilized in- 
dustry, the rude efforts of the savage who combines in one 
person all kinds of labor. The Indian squaw makes her 
own hoe, scratches the ground, plants her corn, tends it, 
gathers it, pounds it into hominy, brings in her own fuel, 
wets up her cake and bakes it in the ashes. The cost of 
this imperfect product, reckoned in hours of toil spent 
upon it by the single laborer, is more than a hundred fold 
greater than that involved in producing the better article, 
which represents an infinitesimal quota of labor expended 
by each of a hundred or more persons contributing to the 
common result. 

From this broad, general view, it is evident that this 
principle of Division of Labor must enter into every de-\ 
partment of Political Economy. Indeed, the whole science 
grows out of the manifold bearings of this principle in the 
structure and functions of civilized society. 

But as it relates to the department of Production, the 
principle is presented in a narrower and more specific view. 
Here the expression Division of Labor has a technical 
meaning, respecting the production of one or another par- 
ticular product. Suppose an establishment for the manu- 
facture of an article, watches for instance, is projected. 
The largest and best results with the least expenditure of 
labor are desired. Obviously it will greatly economize labor 
to give to each man or set of men one part of the watch to 



DIVISION OF LABOK. 51 

make. In the technical sense, then Division of Labor ini' 
plies two things. 

1. An analysis of the article to be produced, and of the 
work to be done into distinct and simple parts. 

2. A distribution of these parts to the persons em- 
ployed, such that each workman shall confine himself, as 
nearly as possible, to a single operation. 

The arrangement contemplates such an adjustment of 
the processes that the several operations shall keep each 
other going. One man's Avork on one part, may balance 
that of three or four on another. The system is complete 
and perfect when there are no superfluous hands and none 
are kept idle, waiting on others' movements, — when the 
several processes fit into each other like the gearing of 
smooth running machinery. 

The Special Advantages of Division of Labor may 
be stated as follows : — 

1. Division of labor shortens the period required for 
learning an oijeration. The more complicated the opera- 
tion, the longer is the time necessary for acquiring the 
skill requisite to the performing of it successfully. But 
this time spent in learning, is useless to the operator and 
to society, except in so far as it is necessary to the crea- 
tion of the product. The longer the time necessary for 
learning an operation, the higher must be the wages of the 
operator for the remainder of his life ; and also, of course, 
the greater must be the price of his products. If this can 
be lessened, the price of course will fall. That this is les- 
sened by division of labor is evident from an obvious ex- 
ample. Suppose that a given process, say the making of 
nails, consists of seven operations ; and that each of these 
operations required one year's practice before it could be 
successfully performed. Now, if seven men were to learn 
this occupation and each one were obliged to learn every 



52 pRODUCTio]sr. 

operation, the time required would be 7x7=49 years; 
whereas, if each of them were required to learn but one, 
the time would be but 7x1 = 7, or, the difference would 
be 49 — 7=42 years of human labor, or six-sevenths of 
the whole time, which would thus be saved. There would 
be six years more of productive labor in the life of each of 
these men ; and, as they had spent less time in acquiring 
their art, they could afford to exercise it for lower wages. 

Besides, there is intimately connected with this cause 
another of considerable importance. Every one in learn- 
ing an art, must, by unskilfulness, destroy a considerable 
portion of capital. And this amount of capital will be in 
proportion to the number of operations which he is obliged 
to learn. Thus, suppose that a man learns seven opera- . 
tions, and, in learning each destroys ten dollars' worth 
of capital, the amount which he will destroy in acquiring 
his whole trade will be 7 X 10=70. If he have to learn 
but one, it will be but ten dollars ; and thus, the difference 
will be 70 — 10=60 dollars, upon every such individual. 
A difference so great as these two combined, when spread 
over the whole face of society, will have no inconsiderable 
effect upon the annual net revenue of a community. 

2. When one man performs all the operations required 
in a complicated process, imich time is lost in passing from 
one operation to another. By division of labor, this loss is 
avoided. 

The effect of habit is known to every one. It renders 
any operation easy, Avhich is frequently repeated. The 
m*nd and the muscles become adapted to a particular form 
of labor ; but if that form of labor be suspended and our 
attention be directed to another, it requires a considerable 
time before we can acquire a different habit, and, in the 
mean time, the good effects of the preceding habit are, to a 
considerable degree, lost. Hence, he who is frequently 
passing from one occupation to another, is in the condition 



DIVISION OF LABOE. 53 

of him who is,- during his whole life, forming habits j and 
never in the condition of him who has the advantage of 
habits already formed. Besides, this long habit produces 
in the muscles a capacity for continued exertion. He who 
is in the hahit of performing an operation, can perform it 
without sensible fatigue for several hours together. Every- 
one who has ever sawed wood or used a spade in a garden, 
is sensible of this fact. ISTow, all this advantage is lost by 
frequently turning from one operation to another. 

3. Where complicated tools are to be used and there is 
no division of labor, much time is also lost in adjusting 
them to the different kinds of work. By division of labor 
this disadvantage is obviated. Suppose that nails of differ- 
ent sizes are to be made, and it is necessary that the ma- 
chinery, in order to adapt it to the different kinds of work, 
should be frequently adjusted ; the time so occupied pro- 
duces nothing and is lost. If, on the contrary, one machine 
is permanently used for the manufacture of nails of one 
particular size, all this loss is avoided. This is also more 
obvious when the adjustment involves expense ; as, for in- 
stance, when a furnace is used. If a furnace be heated, 
and then suffered to cool Avhile the operator is performing 
some other labor, the fuel consumed after he leaves it, and 
that which is used to bring it again to the requisite tem- 
perature are a total loss, in addition to that of the time 
and labor required in kindling the fire, and in waiting for 
the rise of temperature. By dividing the labor so that one 
person shall be always employed at the furnace, while others 
are employed at other parts of the process, much capital 
and labor will be saved. 

4. By constantly pursuing the same occupation, a 
degree of shill and dexterity is acquired, which greatly 
increases the productiveness of human labor. This advan- 
tage is lost by employing the same individual upon several 
operations. Adam Smith informs us, that a blacksmith 



54 PEODUCTIOK. 

who occasionally makes nails, but whose whole business is 
not that of a nail-maker, can make but fr.om eight hun- 
dred to one thousand nails a day ; while a lad who has 
never exercised any other trade, can make upwards of 
twenty-three hundred a day. All who have been accus- 
tomed to visit manufactories, must have been surprised to 
observe the dexterity which is acquired even by children 
in performing the operations in which they are exclu- 
sively engaged. It is probable that the performers of jug- 
glery, or sleight-of-hand, derive their skill almost entirely 
from this cause. They seldom perform more than a few 
operations, but by practicing these, and these alone, for a 
great length of time, they at last attain to a proficiency 
which, to a spectator, is incomprehensible. 

5. Division of labor suggests the contrivance of tools 
for the performance of the operation in which it is em- 
ployed. 

The more completely any process is analyzed, the sim- 
pler must become the individual operations of which it is 
composed ; and the simpler any operation is, the easier is 
it to contrive a tool or an adjustment by which it may be 
performed. Adam Smith informs us, that in the first 
steam engines, boys were constantly employed to open a 
communication between the boiler and cylinder, according 
as the piston ascended or descended. One of these boys 
observed, that, by uniting the handle of the valve which 
opened this communication with another part of the ma- 
chine, the valve would open and shut without his assist- 
ance and leave him at liberty to play with his fellows. 
One of the most important improvements of this machine 
was thus by division of labor, brought within the capacity 
of a playful boy. It would have been very difficult to 
invent machinery for the making of nails, when all the 
processes were considered as a complicated whole. But 
after the several operations are divided and are assigned to 



DIVISION" OF LABOK. 55 

individuals separately, it becomes comparatively easy to 
construct an adjustment by which any of them, singly, 
could be performed. This is the first step in invention. 
But this is not all. After these several single instruments 
have been invented, the next step is to combine them to- 
gether. This is the most finished effort of mechanical 
genius. This is the principal differenc3 between a tool 
and a machine. A tool performs one single operation ; a 
machine combines several tools together, and accomplishes 
either the whole, or a considerable part of a complicated 
process. 

6. Every one at all acquainted with manufacturing 
employments, must have observed that some of the opera- 
tions in a given process, require greater muscular power or 
greater still or greater dexterity than others. Some, for 
instance, can be performed only by the most experienced 
workmen, while others can be perfectly well performed by 
children. Now, by division of labor a manufacturer is 
enabled to employ upon each operation precisely/ the labor 
adapted to it, and is obliged to pay for each portion of the 
labor no more than it is actually worth. This must greatly 
diminish the cost of production. Thus, the manufacture 
of pins is divided into ten different operations, and each 
operation employs one laborer. But some of those laborers 
are men ; others are women and children ; and their wages 
vary from six shillings to four and a half pence sterling a 
day. If the labor were not divided, one person must 
understand the whole process, and therefore, must be em- 
ployed at tlie highest price of labor ; and hence, he must 
be paid at the rate of six shillings a day for that part of 
the work which is worth only four and a half pence a day. 
Every one must see that this would greatly increase the 
price of pins, and also occasion a great deficiency in labor. 
It is by this means, also, that occupation is provided for 
the weak and the aged, for females and for children who 



56 PEODUCTION". 

would otherwise be unable to earn any thing. Thus, all 
the labor of the community is rendered productive, and an 
immense amount is annually added to the revenue of a 
country. Nor is the gain, to be estimated at simply what 
is thus earned. The whole community is thus acquiring 
those habits of industry and self-dependence, which are 
essential to its happiness and well-being, no less than to 
the rapid accumulation of its capital. 

Nor are the benefits of the division of labor confined to 
mechanical processes. The results have been equally inter- 
esting in those cases where this principle has been applied 
to intellectual labor. The effect of such a division is seen 
in the following account, which is introduced here, not 
only because it very happily illustrates this whole subject, 
but also because it may suggest to scientific men some 
other cases in which it may be again applied with similar 
benefit. 

" During the period of the French Revolution, the government 
was desirous of producing a series of mathematical tables, in order 
to facilitate the extension of the decimal system, which had been 
recently adopted. They directed their mathematicians to con- 
struct such tables on the most extensive scale. The superintend- 
ence of the work was confided to M. Prony. It happened that 
shortly after he had undertaken it, he opened in a bookstore 
Adam Smith's "Wealth of Nations," and, by accident, turned 
to the chapter on division of labor. The thought immediately 
suggested itself that this might be adopted in the work in which 
he was engaged. He immediately followed out the suggestion, 
and arranged his plan accordingly. He divided the persons who 
were to execute the labor into three sections : 

TTie first section was composed of five or six of the most emi- • 
nent mathematicians of France. Their duty was to ascertain the 
analytical expressions which were most readily adapted to simple 
numerical calculation, and which could be performed by many 
individuals employed at the same time. The formulae on the use of 
which it had decided, were to be delivered to the second section. 



DIVISION OF LABOR. 57 

The second section consisted of seven or eight persons of consid- 
erable acquaintance with mathematics, whose duty it was to con- 
vert into numbers the formulas put into their hands by the first 
section ; and then to deliver out these numbers to the members of 
the third section, and to receive from them the finished calcula- 
tions. These they could verify without repeating the work. 

The third section consisted of sixty or eighty persons. They 
received the numbers from the second section, and, using nothing 
more than addition and subtraction, returned to that section the 
finished tables. Nine-tenths of this class had no knowledge of 
arithmetic beyond its first two rules ; and it is remarkable that 
these were usually found more correct in their calculations than 
those who possessed a more extensive knowledge of the subject. 
The extent of the labor which was thus executed in a remarkably 
short space of time, may be estimated when it is stated that the 
tables thus formed are computed to occupy seventeen large folio 
volumes. And yet we see that the greatest part of the labor was 
actually accomplished by persons who might be employed at very 
small expense, and who could do the work assigned them as per- 
fectly as those whose labor was the most expensive. * 

* Babbage on Economy of Machinery. 
3* 



CHAPTER VII. 



LIMITATIONS TO THE DIVISION OF LABOE. 

The principle so beneficial in its varied application, is 
limited by certain conditions which cannot be set aside. 
We may notice four such restrictions. 

1. TJiat ivMch comes from tlie Nature of the Process. 
Every process can be analyzed into its ultimate elements ; 
that is, into the various simple processes of which it is 
composed. Thus in pin-making the straightening of the 
wire is one operation, the cutting it into equal lengths is 
another, the sharpening of the points is another, the head- 
ing of the pin is another, etc. But when we have reduced 
the operation to its simple elements we can proceed no 
further. Hence, here is our necessary limit ; for it is no 
division of labor to employ two men to perform precisely 
the same operation. Hence an establishment Avhich car- 
ries division to this limit, will be able from what has been 
said, to undersell another which does not carry it to the 
same degree of perfection. And hence, in establishing 
a manufactory, it is important so to adjust the number 
and kind of workmen, that, when the different operations 
of a process have been assigned to different persons, these 
persons may he in such proportions as exactly and fully to 
employ each other. The more perfectly this is accomplished 
the greater will be the economy. And, this having been 
once ascertained, it is also evident that the establishment 



LIMITATIOKS TO DIVISIONS' OF LABOR. 59 

cannot be successfully enlarged, unless it employ multiples 
of this number of workmen. 

2. Division of labor may he limited ly Deficiency of 
Capital. Division of labor in manufactures, cannot be 
carried on unless the proprietor have sufficient capital to 
employ, at the same time, all the persons necessary to such 
a division, and to keep them so employed until the pro- 
ceeds of their work enable him to furnish them again with 
fresh material. This is of course a considerable outlay, 
and supposes a considerable accumulation of the proceeds 
of pre-exerted industry. Hence, in a poor or in a new coun- 
try, there can he hut little division of labor. No one has 
more than enough capital to employ himself, and, perhaps 
one or two laboren's ; and hence each individual performs 
all the operations of each process, and frequently those of 
several processes. The same individual is the farrier, 
blacksmith, cutler, and perhaps wheelwright, for a whole 
settlement. To illustrate this by a single instance : If a 
nailer be able to purchase no larger amount of iron and 
coal than he can use in the manufacture of nails in a day, 
he must perform all the parts of the process himself ; and 
of course must labor very disadvautageously. As soon 
however, as he is able to double his capital, he may employ 
another person to work with him, and they may then in- 
troduce a division of labor. When he has tripled his capi- 
tal he may employ another workman and carry his division 
still further. He may thus go on until he has reduced the 
process to its simplest elements. When he has gone thus 
far, the accumulation of his annual capital will enable him 
to invest something in fixed capital. He will thus be able 
to purchase some of the simpler machines by which some 
of the parts of his process may be executed. To these he 
will add others as he advances in wealth, until his accumu- 
lated means enable him to combine them into one machine 
for completing the whole process. Thus he becomes a 



60 PEODUCTION". 

manufacturer, and derives the larger part of his revenue 
from the use of his fixed capital. At every step his gains 
will be greater, and at the same time the price of his pro- 
duct will become less. It is not pretended that all these 
changes always, or frequently, take place within the life- 
time of a single individual. The progress of society is not 
generally so rapid. Yet they sometimes occur in the man- 
ner stated. The illustration shows the tendency of things. 
But whether the results are comprised in the life-time of 
one, two, or three individuals, the principle is the same. 

3. Divisioji of labor may he limited hy the Demand for 
the article produced. Suppose that; in a given district, 
there is a demand for one hundred pounds of nails per day 
and that these can be made by two men. If three men 
could, by division of labor, make two hundred pounds per 
day there would be but small gain either to the workmen 
or to the public ; because these men would of course lie 
idle half of the time, and for this time they must be paid 
as well as for the time in which they are employed. Or, 
if they did not lie absolutely idle, that portion of the time 
which was employed on other labor would be of compara- 
tively small value ; and they by attending to other busi- 
ness, would lose the skill which complete division of labor 
confers, and which is one of its principal benefits. The 
case is still stronger, if we take into view the fact that 
division of labor supposes a large investment of fixed capi- 
tal, and that those who are educated to any manufacturing 
business, can rarely employ themselves upon any thing 
else. If the laborers at any of our manufactories were 
employed only half the time their wages must be doubled ; 
for their families must be supported one day as well as 
another, and thus the interest of the whole investment 
must be charged upon half the quantity of product. These 
causes together with the loss of skill in workmen, would 
more than double the price of products, and would of ne- 



LIMITATIONS TO DIYISIOF OF LABOR. 61 

cessity, carry back the division of labor to its less perfect 
state. 

But this demand must depend upon several circum- 
stances. The most important of these are the following : 

a. The Number of the Consumers. When the number 
of inhabitants is small as in a new settled country, or in 
an isolated situation, the demand must of course corre- 
spond to their number. One hundred men will require 
but one-tenth as many hats or shoes as one thousand men. 
It is on this account that wealth accumulates most rapidly 
on navigable waters, because the market of the producers 
is not limited to themselves, but may be easily extended 
to other places. 

J. Tlie Wealth of the inhaMtants. Demand does not 
signify simple desire for an article, b^^t desire for it, 
combined with the ability and willingness to give for it 
what will remunerate the producer. Hence, the greater 
the ability in a given population to remunerate the pro- 
ducer, the greater will be the demand. The demand for 
hats in a population of one thousand men, would be lim- 
ited to those persons in that population who ivere able to 
buy a hat. The larger the proportion of such individuals, 
the better it would be for the hatter and for every other 
producer. Hence we see that every individual is inter- 
ested in the prosperity of every other individual in the 
commvmity. 

c. The Cost of the article. The greater the cost of 
the product, the smaller will be the number of persons 
who are able to purchase it. Hence the less will be the 
demand ; and hence, also, the less opportunity will there 
be for division of labor. And besides the greater the cost 
of the article, the greater amount of capital is required in 
order to produce it by division of labor. Hence, this 
cause operates in two ways to prevent the employment of 
this means of effecting the reduction of price. Thus, if a 



62 PRODUCTION-. 

community consist of one thousand men, and of these one 
hundred be worth one thousand dollars per year ; four 
hundred be worth five hundred dollars ; and the remain- 
der be worth but two hundred and fifty dollars per year ; 
and an article be produced within the reach of only the 
first of these classes, it can have but one hundred pur- 
chasers ; if it come within the reach of the second class, it 
will have five hundred ; and if it come within the reach 
of the third class, it will have one thousand purchasers. 
Hence it is that division of labor is but sparingly used in 
the manufacture of rich jewelry, and in articles of expen- 
sive luxury ; while it is so universally used in the production 
of all articles of common use. Hence we see, that the 
benefits of the use of natural agents and of division of 
labor, are vastly greater and more important to the mid- 
dling and lower classes, than to the rich. These means 
of increased production, reduce the cost of the necessaries 
and of the essential conveniences of life to the lowest rate, 
and of course bring them, as far as passible, within the 
reach of all. 

d. Facilities of Transportation. This is evident, 
from what has been said. The cost of an article depends 
not only on the cost of its origifial production, but also 
upon the cost necessary to biding it to the consumer. Goal 
may be very cheap at a coal mine, but if it must be borne 
on the shoulders of men to the consumer, it would at a 
few miles from the mine become so dear that no one would 
be able to use it. The demand would be so small that 
there would be no profit either in investing capital in the 
machinery, or in employing division of labor to raise it 
from the mine. But if horses be used to transport it to 
the consumer, the demand will increase. Again, if for 
horses, canals and railroads be substituted, it will become 
cheap, and the demand will increase still more ; and, with 
every such improvement that circle of consumption ex- 



LIMITATIONS TO DIVISION" OF LABOR. 63 

pands, of wliich the mine is the centre. The same princi- 
ple applies to manufactures, specially those of iron or 
heavy ware, and it applies just in proportion as transpor- 
tation forms a large or small part of the cost to the con- 
sumer. And thus, in general, we see the principle on 
which facilities for internal communication improve the 
condition of both the other branches of industry. For this 
reason the price of land and grain rises in a district through 
which a canal or a railroad passes ; and for the same rea- 
son manufactories may at one time be successfully estab- 
lished in situations where they at another time would have 
been useless, if not ruinous to the proprietor. And still 
more generally, we see the manner in which all the branches 
of labor assist each other. A railroad or a canal can never 
profitably be constructed in a country where there is noth- 
ing to be transported. But where agriculture, manufac- 
tures and commerce are productive, and hence require a 
large amount of transportation, there these facilities are 
immediately in demand. Were Liverpool and Manchester 
to decline, of what use would be the railroad between 
them ? And, on the other hand the railroad between 
them, by reducing the cost of all articles bought and sold, 
diminishes the cost of living in both places, enables the 
producer to come into market with greater advantages, in- 
creases the profits in all kinds of industry, facilitates the 
accumulation of capital and thus adds greatly to the annual 
revenue of both cities. 

4. The Division of Labor is limited also hy the Execu- 
tive capacity of man. In every large establishment there 
must be one person at the head, whose supervision mustbe 
felt in all departments, to hold every one employed to strict 
responsibility and fidelity in his particular service. His 
judgment must determine a thousand questions respecting 
both general results and detailed operations. And his will 
must pervade the whole system of divided labor, as a guide 



64 PRODUCTioisr. 

and stimulus to many subordinate wills, that all may work 
in harmony for a common end. The qualities which fit 
one for these exercises we call executive capacity. The 
successful management of a great manufactory thus re- 
quires talents of the highest order. But in the man most 
highly endowed, there is a limit of both capacity arid en- 
durance. Theoretically, it would be an advantage to have 
the entire industry of a state perfectly systematized on the 
principle of division of labor. But no one human head 
would be equal to the supervision and control essential to 
the harmony and success of such an arrangement. We 
have frequent and sad instances of minds deranged, of 
lives sacrificed and of great enterprises wrecked by an ex- 
pansion of business beyond the capacity of the manager's 
mind. In these days, this limitation of the principle 
under consideration is tod little regarded. 

Evils incident to the Application of this Prin- 
ciple. — Under the division of labor so advantageous, in 
most respects, there are liabilities and tendencies to evil 
which must be noticed. AVe mention 

1. The Danger of impairing physical Health and Vigor, 
A variety of exercise is essential to the full and healthful 
development of the faculties and functions of the body. 
But the division of labor often involves long and close con- 
finement to a single operation — an overtasking of some one 
limb or set of muscles — a posture which may cramp and 
oppress the vital organs — exposure to deleterious gases and 
exhalations — the breathing for hours in crowded rooms of 
air bereft of oxygen and charged with carbonic acid. It 
offers also strong temptations to the confinement and 
severe labor of children not yet grown, by which their 
bodies are depressed and their lives ai'e shortened. The 
vital statistics of large manufacturing towns present too 
many painful facts illustrating this evil. There is a real 



EVILS INCIDENT TO DIVISION OF LABOK. 65 

danger here, but it may be in great measure counteracted 
by the careful study of sanitary measures. Wise economy 
dictates the introduction and use, even at some expense, 
of appliances which secure to laborers of every kind pure 
air and varied physical exercise. 

2. -The mind is liable to le Contracted and Enfeebled. 
When one's attention and energies are all absorbed in a 
minute operation, such as sharpening pins or counting 
buttons by a machine, the free development of the mind 
is likely to be cramped and hindered. This liability must 
be recognized. It is however relieved in part by the law 
of habit, inherent in the very constitution of the mind. 
Under this law, the mind's action in the particular opera- 
tion by constant exercise runs on almost unconsciously 
with the machine, as though identified with it, and the 
other faculties are free to be engaged about other matters ; 
just as when walking, while each step really requires an 
exercise of attention, judgment and will, the whole action 
is so much a matter of habit that the mind is free for the 
exercise of fancy or profound thought on a wide range. 
Moreover, the association of numbers in large establish- 
ments, gives scope for the introduction of means of intel- 
lectual improvement, such as schools, lyceums, reading- 
rooms and lectures which may effectually counteract this 
tendency, and become a real advantage to the whole com- 
munity of laborers. 

3. The Division of Labor may involve some loss of In- 
dependence and Self-Respect. It diminishes the numbers 
of those who manage business for themselves and thus 
throws into the class of workmen dependent on wages, 
many capable and worthy men whose manliness and char- 
acter would be better ^developed, and whose chances for 
acquiring wealth would be greater under the responsibility 
of a business of their own. In large establishments, also, 
the fate of a great body of workmen hangs on the success 



66 PRODUCTION". 

or failure of a few managers and capitalists. The failure 
of a single manufacturing company thus involves a sweep- 
ing disaster, and the mischiefs of a general financial crisis 
are aggravated as all are involved together. This evil may 
be relieved by devices for giving employes a personal in- 
terest in the business and by a system of promotion to 
higher and more responsible trusts on the ground of fidel- 
ity and efiBciency. There can be no doubt that on the 
whole, the average condition and prospects of working me a 
are improved by the systematic arrangement which under 
the principle of division of labor prevails in large industrial 
establishments. 

4. The principle of division of labor favors combina- 
tions and strikes, as it brings together and holds in inti- 
mate association, as a class, great numbers of dependent 
and often unintelligent workmen. We only mention this 
item in this connection. The full discussion of this topic 
belongs to the third division of our science — distribution, 
and will there be treated at some length. 

These incidental evils are greatly overbalanced by the 
advantages which proceed from the application of this law. 
Yet they are of importance enough to deserve serious con- 
sideration and to engage earnest study to devise means for 
their relief. Far-seeing self-interest, no less than the spirit 
of philanthropy prompts to such study and such efforts. 

International Division of Labor. — This phase 
of our subject demands some special notice and illustration. 

It is manifest that the different portions of the same 
country possess different facilities for producing the objects 
of human desire. No district possesses advantages for 
producing everything ; but almost every district possesses 
peculiar facilities for producing something. Now, natural 
advantages are clearly nothing more than meatis of in- 
creased productiveness of labor in the creation of any par- 



IKTER]<rATION-AL DIVISION OF LABOR. 67 

ticular product. If one soil will produce forty busliels of 
wheat to the acre, with the same labor that another will 
produce twenty, the labor upon the first is twice as pro- 
ductive as that upon the second ; that is, the owner of the 
one has a machine by, which he can, with the same labor, 
produce twice as much as his neighbor. But perhaps the 
soil which will produce only twenty bushels of wheat, will 
produce forty bushels of corn per acre, while the other 
soil will produce only twenty. This second soil is there- 
fore an instrument which gives a double productiveness to 
labor in the raising of corn*. Now it is manifest that if 
each one devotes himself to the production of that for 
which nature has given him peculiar facilities, his amount 
of production will be greater, he will himself be richei", and 
the whole community will be supplied at a diminished cost. 
Suppose that each occupied twenty acres, and each pro- 
duced the crop for which he had. the greater advantages ; 
the result would be 20x40=800 of wheat, and the same 
of corn ; =800 bushels of wheat and 800 of corn. Suppose 
again they divided their crops, and each appropriated ten 
acres to wheat and ten to corn ; the result would be 
10x40 = 400 of wheat, and 10x20=200 of coi-n ; and 
10x40=400 of corn, and 10x20 = 200 of wheat; that is, 
600 of wheat and 600 of corn ; that is, there would be 600 
instead of 800 bushels of each raised, and the loss to both 
and to the community would be 200 bushels of each a year. 
By so much would they both be poorer than by devoting 
themselves wholly to that product for which each had the 
greatest natural advantages. 

Or, to take another case. Suppose one district rich in 
soil and adapted to the production of wheat, but level and 
far inland, and therefore unadapted by position and want 
of the proper natural agents, to the production of manu- 
factures ; and another district on the sea-board hilly and 
sterile, adapted to manufactures but unadapted to the cul- 



68 PEODUCTioisr. 

ture of wheat. On the first, with one day's labor, a man 
may raise two bushels of wheat, but could produce but four 
yards of cloth. On the other, by the same labor, a man 
can produce twelve yards of cloth, but can raise only one 
bushel of wheat. Now it is manifest that by each district's 
devoting its labor to that kind of production for which it 
has the greatest natural facilities, the production of the 
whole country will be increased. It is also evident that a 
man in the wheat district will provide himself with cloth 
at a cheaper rate by raising Avheat and procuring cloth by 
exchange, than by manufacturing it himself ; and on the 
other hand, that the manufacturer will provide himself 
with wheat at a much cheaper rate by making cloth, than 
by raising wheat himself. Thus by this form of division 
of labor, the f)roductive power of both is increased ; their 
desires are gratified at the expense of less labor ; and thus 
both are rendered richer and happier. 

All this seems obvious, if only the several districts of 
the same country be compared. Audit is obvious, because 
every one perceives that God has bestowed upon different 
districts of the same country different advantages, which 
it is foi: the interest of that country that each district 
should improve to the utmost. But every one may see 
that the same principles apply to different nations inhabit- 
ing the different quarters of the globe. The separation of 
the earth into warring nations, is nothing but the arbitrary 
work of man ; it alters neither the qualities nor the rela- 
tions which Grod has given to things, nor the laws under 
which he has constituted man. If a man own a farm of 
which one part is suited only to tillage, and another part 
only to grazing, and he divide it and sell the pasture land 
to his neighbor ; this does not alter the nature of the 
soil. Will it not be just as profitable to appropriate each 
part to the purpose for which God designed it, after the 
purchase as before ^ 



IKTEEKATION"AL DIVISION 05- LABOR. 69 

Every man needs, for the gratification of his innocent 
desires, nay, for his conveniences and even, necessaries, the 
productions of every part of the glohe. To be convinced of 
this, we have only to enumerate tlie articles which furnish 
our houses, the food that covers our tables, and the rai- 
ment which clothes our bodies. How greatly would all 
our means of happiness be diminished, were we deprived 
of the iron, the furs, and the hemp of the North ; the cof- 
fee, teas, sugar, rice, fruits, and spices of the South ; or 
the wool, the wheat and the manufactures of temperate 
climates. Every one must be convinced that the happiness 
of every man is increased in proportion as he is furnished 
with the greatest number of these objects of desire ; and 
furnished with them in their greatest perfection and at the 
cheapest rate. 

But it is evidently the will of our Creator, that but few 
of these objects, every one of which is necessary to the 
happiness of every individual, should be produced except 
in particular districts. Others, if they can be produced 
in several places, can be produced much more cheaply, and 
in greater perfection in some places than in others. Every 
part of the glohe possesses peculiar advantages for the pro- 
duction of*something; but no part possesses advantages for 
the production of every thing. Hence we see on the prin- 
ciple illustrated above, that the annual production of the 
glohe ivill he greatest ; that is, there will be the largest 
amount falling annually to the share of every individual ; 
that is, every individual will be richer and happier, ivhen 
each portion of the glohe devotes itself to the creation of 
those products for which it has the greatest natural facili- 
ties. If a man in New York can produce by one day's 
labor, one hundred pounds of flour, but could not produce 
more than one ounce of coffee ; and a man in Cuba can 
produce twenty-five pounds of coffee, but cannot produce 
more than one pound of flour, and they exchange as we 



70 PKODUCTIOiT. 

have before seen they must exchange, labor for labor ; the 
one will produce by a day's labor twenty-five pounds of cof- 
fee instead of an ounce ; and the other one hundred pounds 
of flour instead of a pound. Is not this better than for 
the New York farmer to raise his coffee in a hot-house, 
at the expense of a day's labor for an ounce ; and the 
West Indian to raise his wheat on the mountains, at the 
expense of a day's labor for a pound. Such are tlie advan- 
tages of that division of labor suggested hy Geographical 
Fosition, 

And the Final Cause of all this is evident. God in- 
tended that men should live together in friendship and 
harmony. By thus multiplying indefinitely their wants, 
and creating only in particular localities the objects by 
which those wants can be supplied, he intended to make 
them all necessary to each other, and thus to render it no 
less the interest than the duty of every one, to live in 
amity with all the rest. 

Nor is the application of this principle confined to 
geographical localities. The simple fact that a nation 
possesses facilities, be they either natural or acquired, for, 
creating any product at a cheaper rate than any other 
nation, is a reason why that nation should devote itself to 
the creation of that product; and why another nation 
sliould for the same reason improve its own peculiar ad- 
vantages. Thus, there are certain states of society, and a 
certain amount of accumulation of capital, most favorable 
to the creation of certain products. A nation in this State 
and with this accumulation, can furnish these products 
cheaper than her neighbors ; and this is a reason why they 
should purchase them of her. Could not one of our old 
States supply one of the new States with manufactures, 
cheaper than the new State could produce them herself ? 
And is this not a reason why the new State should procure 
them by exchange rather than by direct production ? Is 



IKTEEKATIOlfrAL DIVISIONS" OF LABOK. 71 

it not cheaper for an Indian to buy a rifle of an European 
than to attempt to make one for himself ? 

This is however by no means to assert that such ar- 
rangements and relations are to be permanent. As a 
country accumulates fixed capital, it creates its own facili- 
ties for creating almost every kind of manufactured pro- 
duct. One nation will naturally begin to do this at the 
same point of accumulation at which another began to do 
it. And the way in which to arrive at this point the 
soonest, is to become rich as fast as possible j that is, to buy 
as cheap as we can, or in other words to procure annually 
as many objects of desire as possible, for a given amount 
of labor. A tribe of Indians would much sooner be able 
to make rifles for itself, by purchasing at first rifles of an 
European, than by determining that it would never use 
rifles until it could manufacture them for itself. As the 
use of a rifle would render industry more productive, and 
thus render the tribe richer, it would bring them one step 
nearer to that degree of accumulation at which they might 
begin to make rifles for themselves. But the resolution 
not to purchase of others would have no such tendency, 
inasmuch as it would do nothing whatever toward accumu- 
lating production ; but would on the contrary, shut them 
out from the very means ofiered them for most rapidly 
benefiting their condition. 

To sum up what has been said. It will be seen that 
production will be increased ; that is, men will be richer 
and therefore may be happier, as the following conditions 
are complied with : 

1. As the laws of nature, designed by our Creator for 
our benefit, are understood ; 

2. As the means are devised for availing ourselves, 
in the most successful manner, of the utility of these 
laws ; 

3. As the human labor necessary to be expended is so 



72 PEODUCTION". 

arranged as, with a given expenditure, to produce the 
greatest and most perfect result ; and 

4. As the inhabitants of the earth in different locali- 
ties, devote themselves most exclusively to the production 
of those objects of desire, for the production of which they 
have received, either directly or indirectly, from their 
Creator, the greatest facilities. 

Or, still more generally, production will be abundant ; 
that is, man will enjoy the means of physical happiness 
in proportion to his individual industry, both of body and 
mind ; and to the degree of harmony and good feeling 
which exists between the individuals of the same society ; 
and also between the different societies themselves. 



CHAPTER VIII. 



CAPITAL. 



Its Definition. — Caintal is that part of Wealth which 
is employed in Production. The word is often used 
Ttiguely and with diverse meanings. "We need to adhere 
to a strict definition. The generic idea is, as stated, 
wealth set apart to be consumed in the reproduction of 
wealth. The technical use of the term always has refer- 
ence to Production. 

All capital is ivealth, hut all wealth is 7iot capital. 
Suppose a farmer's crop this year gives him a. hundred 
bushels of wheat to spare. He may exchange this surplus 
for gold, and bury the gold for safe-keeping. That gold 
is wealth, but it is not capital ; for while buried it can 
contribute nothing to the further production of wealth. 
He may exchange his wheat for a beautiful painting to 
adorn his home. The picture is still wealth, but, hanging 
on the wall, it will do nothing to increase the next year's 
crop — it is not capital. He may exchange his surplus of 
wheat for a horse, or for labor in clearing and draining 
another field. Now the wheat is gone and the money is 
gone, but the wealth is still his, in the horse or in the im- 
proved land, turned into means for the production of a 
larger crop next year ; that is, he has turned this part of 
his wealth into Capital. 

Capital is not synonymous loith Money, as too many 
suppose. The money for which the farmer sold his wheat, 
while simply hoarded, is wholly withdrawn from produc- 



74 PKODUCTIOF. 

tion, and though he may think himself rich in its posses- 
sion, it is not capital for him or anybody else. If he holds 
it as a fund for the payment of laborers' wages and the 
purchase of implements next year, it is prospective capital 
and may be all that will be required for these purposes ; 
but as money, it cannot itself assist his production. What 
he wants is what the money will buy, and in any view, it 
constitutes but a small part of his real capital. His land, 
his buildings, his live-stock and his tools, make up the 
bulk of his capital. So money in circulation as an instru- 
ment of exchange, performs an important function in the 
productive industry of a country, as will hereafter be 
shown. But in the case of an individual, or a joint-stock 
company, in a community or a nation, though the whole 
capital is estimated in terms of money, the money in hand 
amounts to very little in proportion to the capital actually 
in use. 

The Origin of Capital. — Capital is aliuays the 
fruit of past lahor, saved. A farmer's boy once received as 
a reward for a bit of work, the gift of an ewe-lamb. It 
was the first thing he ever earned. He might have sold 
the lamb to a butcher and spent the avails for his imme- 
diate gratification. Instead of that, he kept his lamb and 
cared for her and her young. The clip of wool and the 
natural increase from year to year, were saved in like man- 
ner, till he came into possession of a valuable flock. In 
due time he sold the flock, and with the avails commenced 
business as a merchant. Maintaining still the habit of his 
youth, he labored diligently, and saving the profits, stead- 
ily added to his capital, till he stood in the foremost 
rank of the merchant princes of New York, using a vast 
capital to combine the industries of two continents. The- 
lamb, the first fruit of his labor, saved, was the beginning 
of his capital — the nucleus of his subsequent fortune. 



CAPITAL. 75 

Such is universally the origin and the growth of capital. 
It begins in saving and grows by the continued exercise of 
itidustry and frugality. Labor produces wealth. That 
portion of wealth which is saved from consumption for 
immediate gratification and appropriated to increase future 
products, is capital. The term can properly be applied to 
nothing else. 

Even the savage will spend some labor in making a 
bow and arrows that he may obtain larger returns from 
hunting. But he accumulates little or no capital beyond 
this, simply because he is indolent, thriftless and self-in- 
dulgent. He will work only when the necessity of the 
hour compels him to do so. He consumes the fruit of his 
labor at once, on present gratification, reckless of future 
needs. His first step toward civilization is to learn fore- 
thought and self-denial — a hard lesson always with most 
civilized men, as well as with savages. The hardest tiling 
about it is to make a beginning. The first step taken, 
there is a joy in conscious possession and a hope of accumu- 
lating more which give zest to further effort till the exer- 
cise grows into a habit and sometimes into a morbid pas- 
sion. To provide facilities for guarding and utilizing the 
smallest savings and to encourage :ill to exercise self-restraint 
and forethought with reference to a future good, are im- 
portant means for increasing capital and enlarging the 
production of wealth. 

But we need to emphasize this principle in one aspect 
of it. Many are disposed to think of Labor and Capital 
as things quite diverse in their nature and necessarily aji- 
tagonistical in their respective interests. But as we see, 
the truth is that capital is nothing but past labor embodied 
and reserved for present* labor . to work with. They are 
indispensable to each other, and in the processes of pro- 
duction must always combine for a common end. What- 
ever injures either works a common damage — whatever in- 



76 PEODUCTION". 

creases the efficiency of either works a common benefit. 
When the representatives of these two natural partners in 
production are arrayed against each other, there must be 
something radically false and wrong in prevalent popular 
sentiment, or in the social organization. 

Forms of Capital. — The products of previous labor 
appear as capital in four distinct forms. 

1. In the form of Materials to which present lahor is to 
he applied. The farmer must have seed, manure, breeding 
animals, etc., which by labor must be put into fit condi- 
tions for tlie processes of Transmutation to produce in- 
crease. The manufacturer must have lumber, cotton, 
iron, wool, leather, etc., which labor shall Transform into 
articles adapted to men's comfort and gratification. The 
merchant's materials are the goods which make up his 
stock, by Transportation to be brought, with increased 
value, within convenient reach of those who desire them. 
Obviously, all these things are the products of former 
labor, on which present labor works to increase value and 
swell the sum of wealth. 

2. Capital takes the form of Implements and Machinery 
hy lohich present lahon is made effective. A man's hands 
and limbs and muscles alone can do little or nothing with 
the materials just named. The farmer must have ploughs 
and carts, divers tools, machines, working animals, etc. 
In this category also must be included the land, which is 
his great instrument of production. The mechanic must 
have axes, ploughs, hammers, a full chest of tools, and the 
manufacturer, engines to create momentum and ingenious 
and complicated machines for directing it in adjustment to 
the materials employed and the articles to bo produced. To 
this division belong also the teamster's wagon, the mer- 
chant's shij), the entire structure and rolling-stock of the 
railway company, and whatever facilitates the transporta- 



FORMS OF CAPITAL. 77 

tion of goods, their exhibition for sale and the financial 
negotiations of every sort incident to the transfer of com- 
modities from producers to consumers. All these are the 
.products of past labor, infinitely varied. As the introduc- 
tion of natural agents and division of labor to increase pro- 
ductiveness is extended, the amount of capital employed in 
this form is increased, and production in almost all de- 
partments is thrown into large establishments. The 
power-loom makes one man's labor equal to that of ten 
with the old hand-loom, and hence the independent weaver 
has no chance in competition with the great factory. 

3. Capital, tahes the form of Means of Sustenance for 
laborers. Present labor does not yield immediately the 
food and clothing necessary to keep the laborer alive. 
The crops of last year must provide for the support of the 
farmer and his help, while this year's crops are maturing. 
Out of the proceeds of previous industry, both the manu- 
facturer and the merchant must furnish present means of 
living for all in their employ. Under this head must be 
embraced therefore, the houses and all the various kinds 
of clothing and food necessary to protect and sustain men 
while at work, and to provide for the comfort of their fami- 
lies. We can suppose an establishment, set up complete 
in itself, so that tenements and rations of food and cloth- 
ing are directly supplied to those who carry on its opera- 
tions. But ordinarily these items are provided for in de- 
tail by the laborers themselves out of their tvages. Nev- 
ertheless, the fund for the payment of wages is an essential 
part of the capital and comes always from the proceeds of 
previous labor. If, as is often the case, by the use of credit, 
the product of present labor is anticipated for these pur- 
poses, the fact is still the same. What is actually con- 
sumed to sustain the workmen is the fruit of previous labor 
borrowed for the time. 

4. For a longer or shorter period, as the process of pro- 



73 PRODUCTION". 

duction goes on, more or less of Capital tahes the form of 
Finished Products, waiting for a market. The process of 
production is not ComjDleted till the products pass out of 
the producer's hands. Commonly, the farmer will find it 
for his convenience or advantage not to dispose of his crop 
as soon as it is gathered. While he holds it back from 
sale, it is capital in his hands, just as truly as his barns 
and tools are. Sometimes business is so active that a man- 
ufacturer's orders will be in advance of his production, but 
oftener he must hold a portion of his products waiting 
orders. It would be bad economy to suspend operations 
and keep both labor and capital, in other forms, idle till a 
purchaser appears, when there is a tolerable certainty that 
the product will in due time find a market. Therefore, 
in estimating the amount of capital required to carry on 
any line of productive industry, some allowance must be 
made for the value of the products which must thus be 
carried for a time. 

In some or all of these four forms, all working capital 
exists ; and in civilized society, no kind of production can 
go on without something in these forms as capital. Even 
the wood-chopper must have his axe, the clothes he wears 
and something to eat for the day, all the fruit of previous 
labor, before he can go forth to his simple work. The 
blacksmith who works alone, capitalist and laborer, both 
in one, must have some iron for material, forge and anvil, 
hammer and tongs for instruments, a home for his shelter, 
bread and meat for food, and a few finished horse-shoes 
hanging in his window ready for the first call. So like- 
wise, the millions of capital invested in the great Pacific 
mills of Lawrence may be all resolved into these four forms, 
or temporarily, it may be, their money-representative. 

Banking capital will be considered at length in another 
connection. Since much of it is directly concerned in 
production, however, it may relieve a question arising in 



COKSUMPTIOK OF CAPITAL. 79 

some mind, to say a few words concerning it here. A 
bank is simply a credit-agency. When a manufacturer is 
out of cotton, or wants a new engine, or lacks means for 
the sustenance of his employes, he might borrow what 
he needs directly of the cotton-broker, or of the machinist 
or of the farmer, but it is often more convenient to 
borrow money of the bank and with it purchase those 
things. But the money is exchanged at once for the 
things wanted, and so its value really goes into production 
in one or other of the forms named. Then the note left 
at the bank means that so much of the capital as is thus 
borrowed, belongs not to the manufacturer but to the 
banking company. So far as the capital of the bank is 
represented by such notes, it is employed in production in 
the forms mentioned ; and the bank as a credit-agency 
simply effects a partnership of different persons for pro- 
ducing certain articles. The act of borrowing and lending 
has added nothing to the sum total of capital. It has only 
served to distribute existing capital for profitable use. 
Banks, therefore, are store-houses for the safe keeping and 
ready distribution of money, the instrument of exchange. 
Their capital renders an important service to productive 
industry through its entire range, and really comprises the 
greater part of the active productive capital of a commu- 
nity which exists in the form of money. Yet as money, it 
is a simple instrument, and belongs to our second division, 
just as a wagon or a plough does. 

The Consumption of Capital.— According to our 
definition, capital is wealth set apart to be destroyed for 
the production of more wealth. " Except a corn of wheat 
fall into the ground and die, it abideth alone, hut if it die, 
it bringeth forth much fruit." So, the great teacher, 
Jesus, stated a fundamental principle of Political Economy. 
Labor applied to capital destroys value of one kind, in 



80 PRODUCTION". 

order to bring forth a superior value of another kind. In 
the process of production, this change passes upon capital 
in each of its forms. The materials are immediately con- 
sumed. The seed-corn dies and the cotton is destroyed as 
cotton- wool, when it enters into the fabric of cloth. By 
use, the instruments slowly but surely wear away and go 
to decay. Food is rapidly consumed, clothing more gradu- 
ally, and more slowly still, the house which gives shelter ; 
but on all, the changes are in one direction, toward destruc- 
tion. The finished product too, is disposed of to others 
and so is lost to the producer, to appear again in new ma- 
terials, new implements, new means of subsistence and 
new products. 

Thus, under the application of labor, capital is under- 
going perpetual changes which involve the destruction 
of value. But these changes are guided by the purpose, 
through that destruction, to bring forth products of greater 
value. If the labor be skillfully directed, the product will 
have a value sufiicient to replace the capital, that is, all 
the materials destroyed, the implements worn out and the 
means of sustenance consumed, with a surplus, which is 
profit. This profit is measured always by the difference 
between the value consumed and the value produced. It 
is obvious, that it matters not in Avhat form capital re-ap- 
pears, if it only re-appear in a form bearing a greater 
value. The smith exchanges gold or silver for coal ; he 
burns up his coal, and nothing is left but ashes. But it 
has produced an invisible substance, called caloric, by 
means of which he has been able to give such an increased 
value to iron, as will not only replace his gold and silver 
but also the iron itself, and will also pay him for his labor. 
The farmer exchanges his gold or silver for manure, but 
this manure will so increase his harvest, that he will be 
able to replace his gold and silver, and also be abundantly 
repaid for his labor. The principle is the same in all cases 



PRODUCTIVE AND UNPRODUCTIVE CAPITAL. 81 

of change of capital. It matters not into what we change 
our capital, nor liow valuable the substance may be that is 
exchanged, if we only receive in return a greater amount 
of value, or that which will procure for us a greater amount 
of objects of desire. 

We see hence in what manner nations and individuals 
grow rich. It is by uniting the industry of this year to the 
capital of last year, and by this process creating an augmen- 
tation of capital. This augmentation will be either greater 
or less, in proportion as our industry has been successful 
in giving additional value to that value which previously 
existed. If we destroy a value and produce another only 
equal to it, we lose our labor. If we destroy a value and 
reproduce nothing, we lose both labor and capital. It is 
only as the value created is superior to the value of labor 
and capital consumed, that we are enriched. Hence we 
see that the rule of economy in the use of capital is to con- 
sume as little as possible for a given result, and out of a 
given consumption to bring the largest possible product. 
The ever recurring problem is liow to consume less and to 
produce more. 

Productive and Unproductive Capital. — Care- 
ful adherence to our definition, in great measure does 
away with this distinction which many writers make promi- 
nent. By our definition, capital is meant to be ahoays 
productive, and wealth unproductive is' not capital. But 
occasionally, through mistaken application, capital is in- 
volved in unprofitable investment, as in experimental 
machinery found unsuitable for its purpose, or in the 
grading of a line of railway, afterward abandoned. A 
financial revulsion. may compel the suspension of business 
so that great factories must stand idle, or it may produce 
a stagnation of trade, such that large stocks of goods must 
be held for many months unsalable. A great railway, after 



82 PEODUCTION". 

large outlays for its construction, may have business enough 
barely to meet its running expenses and repairs, yielding 
no returns for the capital. In these 6ases, it may be said 
that for the time capital is unproductive. But as soon as 
it appears clearly that the investment is unprofitable, so 
much of the capital as can be saved, will be withdrawn and 
applied to some other mode of production. The rest must 
be set down as lost and is no longer capital. 

Many persons who have been induced to furnish means 
for CO ustr noting a railway to run near their property, thus 
becoming stockholders in the company, have lost the capi- 
tal thus invested, so far as dividends are concerned, per- 
haps tlie entire railway property has passed into the hands 
of bondholders, beyond recall. Yet they may have been 
fully compensated by the increased facilities for business, 
and the enhanced value of their property which the road 
has secured. In this case, their stock-investment is un- 
productive, utterly lost perhaps, yet the capital put in is 
still there, productive, as it favors every branch of industry 
in the community, their own with the rest. The greater 
hardship falls on those who have put their means into 
the stock without a chance to share in the benefit of the 
improvement. To them their capital is simply lost, 
though it is still aiding the general production of the 
country. 

While capital is unproductive, it may be considered as 
losing annually its ordinary rate of intere&t. Hence every 
wise economist desires to have the whole of his capital pro- 
ductively invested. Thus the thrifty farmer will spread 
his manure on his fields, instead of leaving it to waste in 
his farm-yard. The efficient merchant will keep his ships 
moving and push his goods off hisliauds as fast as possible. 
And the enterprising manufacturer will be careful not to 
extend his machinery beyond his abihty to keep it run- 
ning. Sound economy prompts every one to unite every- 



FIXED AlfD CIKCULATIKTG CAPITAL. 83 

thing which he can turn into capital, with labor, and to 
keep it so united continually. 

Fixed and Circulating Capital. — Our statement 
of the forms of capital simplifies this distinction. Mr. Mill 
presents this distinction substantially thus. Circulating 
capital fulfills its office in production, by a single use, and 
brings its returns at once. Fixed capital takes a perma- 
nent form, and fulfills its function in production by many 
repetitions of its use, and gathers its returns in quotas 
spread over a period of time. Under this view, it is evi- 
dent that our second form of capital, viz., implements and 
machinery, embraces almost everything which is properly 
called fixed capital. We need to add only so much of the 
third form as is. put into permanent dwellings. All the 
other forms are circulating capital. Thus, materials are 
consumed at once, and cannot again render the same ser- 
vice, as, when leather is transformed into shoes, it is de- 
stroyed as leather, though its value in the shoe is much 
enhanced. So, too, the portion of capital devoted to the 
subsistence of laborers, represented generally by wages is 
consumed when paid over to the laborers. Its service can- 
not be repeated. The wages paid weekly to the hands in 
a cotton-mill no longer exists as the capital of the company, 
though its value reappears in the health and vigor of the 
workmen, and with some, in that which they may save as 
capital to be used for other purposes. In like manner, 
capital in the form of goods or finished products, fulfills its 
function for the manufacturer as soon as they find a pur- 
chaser, though the avails may be applied to replace mate- 
rials, wages or the wear of machinery in the same estab- 
lishment. All this therefoi'e is called circulating capital, 
though the name is not altogether appropriate. On the 
other hand, the buildings, the machinery, the tools, the 
land and whatever is put into its permanent improvement. 



84 PRODucTioisr. 

ships and railways are fixed and durable and over and over 
again for years, it may be for a lifetime, repeat their ser- 
vice, subject only to gradual decay or occasional breakage. 

Economical production requires that the single use of 
circulating capital shall reproduce a value equal to that of 
the original expenditure, with something added for profit. 
Fixed capital answers its purpose, if during the whole pe- 
riod of its repeated use, it brings in enough to pay for itself 
and needed repairs and a profit equal to ordinary interest 
on its entire value. 

The li7ie of" distinction between circulating and fixed 
capital cannot he draion absolutely hy naming commodities 
on either side. A plough regarded as a finished product 
held by the manufacturer, or as a part of the stock of a 
dealer in agricultural implements, belongs to cij'culating 
capital. But as soon as it is taken home for the farmer's 
use, it becomes a part of his fixed capital. Just so it is 
with a turbine wheel or a steam-engine. We class either 
with circulating capital while in the hands of the machin- 
ist, finished, but not sold ; with fixed capital, as soon as 
transferred to the place of service for which it was intended 
in the mill. 

As production increases wealth, the tendency is always 
to put more and more of the accumulating wealth into forms 
of fixed capital. Men wish to use the surplus of value 
gained this year in some way to bring them a larger sur- 
plus next year. Thus a profitable establishment naturally 
expands itself. If ten thousand dollars, invested in build- 
ing and machinery has yielded a profit of two thousand — 
the introduction of additional machinery, costing it may 
be, only two thousand five hundred dollars, may double 
the product and the, profit. So it is in the unfolding in- 
dustry of a new country or a young community. At first 
the amount of capital is necessaiily small. But as every 
year's production gives a surplus, more or less of that sur- 



FIXED AKD CIRCULATING CAPITAL. 85 

plus will be put into machinery for increased production. 
Thus in its steady increase, capital naturally seeks out new 
methods of employment in divers manufactures, and the 
manufacturing interest grows as a tree grows. The sur- 
plus of wealth produced, spontaneously seeks investment 
as fixed capital. In their proper and natural time, there- 
fore, manufactures must he established, and as tliat time 
arrives, they luill le established without the aid of legisla- 
tive enactment, and according to the very laws by which 
accumulation is governed. 

This tendency to the increase of fixed capital, works, 
for the most part, healthily and advantageously for both a 
particular industry, and for the general industry of the 
whole public. But there are two dangers attending it. 

1. There is danger of over-production of certain com- 
modities. If a paper-mil] has produced fifty thousand dol- 
lars worth of paper, and earned a handsome profit, it is 
very natural to suppose that doubling the product will 
double the profit, especially if it is found that a compara- 
tively small addition to the machinery will so increase the 
production. But the market may not dem.and this en- 
larged supply, or it may be that a dozen paper-manufac- 
turers will be thinking and doing the same thing at once, 
and what would have been advantageous to one, proves 
disastrous to all. 

2. There is danger also, of a too sudden and rapid 
absorption of available means in fixed capital. A due pro- 
portion, not exactly definable, must always be maintained 
between fixed and circulating capital. If a manufacturing 
company adds largely to its fixtures, there muse be a cor- 
responding increase of its working capital, or embarrass- 
ment and perhaps failure will follow. The same thing is 
true of the general operations of a community. It hap- 
pens not infrequently, that a period of prosperous industry 
unduly stimulates the manufacturing interest, or the ship- 



86 PRODUCTION". 

ping interest or the railway interest, so that before men 
are aware, a large portion of the capital of a country is 
locked up in instruments for increased production, leaving 
quite insufficient means for cai'rying on the enlarged opera- 
tions. Thus, a few years ago, all England was convulsed 
by a financial crisis, caused in a great degree by a sudden 
and very rapid absorption of capital in railways, which 
while they might ultimately favor the productiveness of all 
industry, could bring in their returns only after a lapse of 
tihie. This mischief is always aggravated by. any inflation 
of the currency, or increase of that which passes for money. 
In this connection, therefore, it is to be observed that 

' Money, though circulating more freely than any thing 
else, tnust really he classed as fixed capital. In the busi- 
ness operations of an individual or an iucoi'porated com 
pany, some money is essential. There, it ordinarily repre- 
sents circulating capital in transition, as when the manu- 
facturer has sold his products and holds the money received, 
waiting for his next purchases of materials or his next pay- 
ment of wages. But, viewed in its true nature, with 
respect to its broad, general function, money is but an in- 
strument of exchange — an instrument, when genuine, 
made of gold or silver, to serve a certain end in the opera- 
tions of industry, just as an anvil is made of iron for its 
specific purpose. The gold might have been transformed 
into a watch-case or a finger-ring, for the gratification 
of desire. Instead of that, it is turned into coin and so 
set apart to serve the production of wealth by a thousand 
repetitions of its function as an instrument of trade. The 
same coin, say an eagle, may go out of the bank in the 
morning, run around a busy circuit and get back in the' 
afternoon. The manufacturer, for example, draws it from 
the bank and pays his laborer ten dollars of wages — he 
transfers the same money to the farmer for a load of pota- 
toes — the farmer passes it to the plough-maker for a 



MOiq"ET-CAPITAL. 8? 

plough — lie in turn pays to to the hardware merchant for 
iron, and the merchant deposits it again in the bank. Dur- 
ing the day, it has represented four kinds of circulating 
capital, carrying each to its appropriate place, but it comes 
back to the bank, just what it went out, money, the same 
thing unchanged. It has rendered important service in 
production, but its service is like that of a wheel-barrow, 
which has transferred to different parties four different 
loads. The money could not do the work of the laborer^ 
the laborer could not eat it, the farmer could not plough 
with it, the plough-maker could not work it into a plough, 
and the merchant could not store it with his goods. But 
it has brought to each just what he needed, and there it 
still is, in its proper depository, ready to repeat like servi- 
ces to-morrow. We see then that real money is a part of 
the products of former labor, saved and set apart for this 
service. It is capital in the form of a permanent instru- 
ment to aid production, hence fixed capital. It is subject 
to slow wear which must be replaced by gold or silver from 
the mines, a part of the circulating capital of the country. 
Hence, as any country may have a greater amount of 
fixed capital than it needs, for instance, of some particular 
kind of machinery ; and as, when this is the case, it sends 
it abroad, or in other words, makes it an article of export, 
or changes it into circulating capital, so is it with money. 
If a country has more money than is sufficient to accom- 
plish its exchanges, it sends it abroad, and receives back 
something that it needs more. Such is, permanently, the 
case in mining countries ; and such is at times, the condi- 
tion of almost every commercial nation. 



CHAPTER IX. 

CO-OPERATIOJ^ OF LABOR AND CAPITAL. 

The true relation of Labor and Capital is that 
of Partners, Co-adjutors for a common end, — Sharers 
in a joint result. This is evident from what has been said 
of the nature and function of each, considered separately. 
In the production of wealth, each is necessary to the other ; 
each is helpless without the other. Antagonism between 
the representatives of these two essentials to the increase 
of wealth is unnatural and ruinous to the interests of both. 
The most stalwart and vigorous man can effect nothing 
without the fruit of previous labor, that is capital, in the 
form of food and clothing, materials and tools. With 
nothing to live on and nothing to work with, he can but 
pine away and die. On the other hand, warehouses full 
of cotton, factories filled with ingenious machinery, stores 
stocked with goods, — capital in whatever form, accumulated 
to whatever extent, can do nothing to increase itself. Let 
alone, it can only rot or rust and go to decay. Productive 
industry begins with the hands of labor laying hold of the 
materials, guiding the machinery, transporting the goods, 
and so working changes which impart new utilities, or in- 
crease existing value. 

This general fact is recognized in many common 
forms of speech. Thus when industry is directed to a 
particular employment, the act is spoken of as applying 
capital to the employment. When land is improved, capi- 
tal is applied to farming. When a factory is set up, capi- 



CO-OPEHATION OF LABOR AISB CAPITAL. 89 

tal is invested in manufactures. In all such eases, labor is 
the thing really applied, but the phrase is very naturally 
used, because it is understood that capital is an indispens- 
able condition of the proposed industry. So we often meet 
with the expression "the productive jJOioers of capital." 
This is not strictly correct, for capital has in itself no 
power at all. Eeally the only productive powers are labor 
and the natural agents which labor directs. Yet the ex- 
pression does not mislead men, because the very term capital 
carries with it the idea of its correlative and supposes labor 
joined with it to make it productive. The common sense 
of men, indicated by their current forms of language, is 
altogether sound on this matter. It most fully recognizes 
labor and capital as the tivo necessary and inseparable 
factors in the production of wealth. It is pitiable to see 
how often minds are sophisticated by some sort of false 
philosophy so as to lose their common sense with respect 
to these things. Here, as elsewhere generally, plain com- 
mon sense is but another name for the universal, intuitive 
perception and acceptance of the first principles of sound 
philosoj^hy. Such a truth is this of the essential equality 
and necessary hai^monious union of labor and capital in 
all productive industry. 

Abstractly considered, labor and capital stand toward 
each other on an Equality. If there is any difference, 
capital is the most helpless of the two. For it is nothing 
but dead matter, whereas labor is a vital force which can 
move itself and pick berries and possibly run down a rab- 
bit, or catch a bird by bare human hands and feet. Dis- 
regarding this difference, we may say that as factors of 
production, they are equal. 

tor their Co-operation, these eleynents meet most 
harmoniously in the same person, — that is, zvhen the laborer 
owns capital enough to employ his oivn labor. This brings 



90 PRODUCTION". 

both elements under the control of one and the same will, 
to be governed by on& self-interest. All rivalry and antag- 
onism are excluded, and according to the measure of his 
cajDital and his physical and mental capacity, the man will 
multiply products. 

But for several reasons, this adjustment cannot be made 
universal. 

1. Such is tJie tendency of capital to increase under the 
steady application of labor, that the man will soon find in 
his hands a surplus, to employ which, he must either bring 
in another who has only labor to work, under him, or lend 
it, as capital to another independent worker. Thus a dis- 
tinction between laborer and capitalist is sure to arise. 
The only alternatives are either to store away the surplus 
as hoarded wealth, — not capital, — or to consume it in a 
more luxurious style of living, or to diminish the amount of 
labor, so as to avoid tlie increase of capital, all of which 
are against the dictates of sound economy. 

2. A greater difficulty comes from the great diversity 
of capacities and tastes among men. Some who are strong 
for physical labor, lack managing skill and tact in saving, 
and so are unable to accumulate and employ capital, acting 
independently. Others,, peculiarly endowed in these re- 
spects, are feeble in body and unfit for manual toil. To 
many, labor is peculiarly irksome and they will seek exemp- 
tion from it, as soon as their increased capital enables them 
to do so. To others the care of managing business is no 
less distasteful, and they choose to labor on, passing their 
accumulating capital into other hands. 

3. Many forms of production of highest consequence in 
civilized society, must he carried on in large establishments, 
where are combined a great amount of capital and great 
numbers and divers grades of laborers. In no other way 
can the full advantage from the use of natural agents and 
the application of the principle of division of labor be 



CO-OPERATIOH OF LABOR AND CAPITAL. 91 

realized. As active invention multiplies labor-saving ma- 
chinery, many of the common articles formerly made by 
hand, by members of the household, have now to be pro- 
duced on a large scale, involving a company of capitalists 
who employ a company of laborers. 

These causes tend to separate the two elements, so that 
capital falls to some and labor to others. The abstract 
equality and mutual dependence Just spoken of is thus dis- 
turbed. As the parties meet to enter into contract with 
each other, the capitalist has the advantage, because lie can 
live on his capital without labor, but the laborer must earn 
the necessities of life by working with somebody's capital. 
Under the sway of short-sighted self-interest, capitalists 
are tempted to use this advantage to dictate terms and 
oppress laborers. We say sliort-siglited self-interest, for in 
the long run, and in the broad view, such oppression must 
react against the oppressors. When laborers are held down 
to starvation wages, capital must be heavily taxed for the 
support of paupers, and in time, there will surely come an 
insurrection to make capital insecure. The consciousness 
of dependence tends to make laborers sensitive to the 
least real wrong and suspicious of wrong where none exists. 
On the other hand, where laborers rally to maintain their 
rights, capitalists grow distrustful and either withdraw 
their wealth from production, or burden its use with em- 
barrassing conditions. Against their own true interests on 
both sides, the parties are thus led to array themselves 
against each other. The strength of this tendency, and 
.the mischiefs flowing from it, as revealed in England and 
recently in our country, demand thoughtful consideration. 
How to guard the rights of both parties so that they shall 
be bound by their natural common interest, in harmonious 
union with each other, is an important and difficult prob- 
lem of political economy. Without attempting here, a 
full discussion of that problem, we may state certain 



92 PEODUCTIOIS". 

Conditions and Circumstances which favor 
the harmonious Union and effective Co-opera- 
tion of Labor and Capital. 

1. A general Distribution of Capital is a matter 
of prime imj)ortaiice. By this is meant such a condition 
of things that the capital of a country shall be in many 
hands rather than few, — that laborers themselves shall have, 
or be encouraged to secure some capital. So distributed, 
capital is most closely Joined with labor, and is used most 
economically. At the same time, labor is stimulated to 
its highest effectiveness. Very many persons are both 
capitajists and laborers, in a position to see most clearly the 
common interests, as requiring mutual good-will and 
hearty union. They will therefore, be inclined to oppose 
the drawing of lines to separate these classes, and all influ- 
ences which tend to produce antagonism between them. 
Some concentration of capital is, as we have already seen, 
essential to the most effective division of labor. But 
beyond this necessity, the great aggregation of capital in 
the possession of individuals, is disadvantageous because it 
leads inevitably to despotic assumption on the one hand, 
and to envyings and jealousies on the other. 

Such a general distribution of capital is opposed by 
anything in the social organization loliivli creates or sustains 
privileged classes. No aristocracy can long be maintained 
without some provision securing to a class special advan- 
tages for the possession and transmission of property. In 
the history of nations, we find the most common form of 
such provision to be by restrictions on the division or dis- 
posal of lands. Whatever also, in legislation or usage by 
the easy allowance of public opinion tends to create or 
maintain monopolies, opposes the general distribution of 
capital. If no hindrances are in the way and no special 
protection is accorded, the natural working of things on 



CO-OPERATIOF 05" LABOR AND CAPITAL. 93 

principles of self-interest will promote a general distribu- 
tion ot capital. 

• This end may be promoted by all 7neasures which en- 
courage saving, especially on tbe part of laborers. Saving s- 
lanhs, established on a sound basis and honestly managed, 
such as New England has had and has profited by for 
more than a century, or perhaps better still, a government 
savings-bank, through a modification of the postal order 
system, on the plan now in successful operation in England, 
render valuable service in this matter. Moreover, the 
stoch of large manufacturing companies may be divided 
into small shares and brought within the reach of the oper- 
atives, so as to induce them by their savings to become 
owners in part of the capital, and so to be entitled to divi- 
dends in addition to their wages. Such measures elevate 
labor and give it. independence, and also increase capital 
by devoting much wealth, that would be otherwise wasted, 
to production. Capital thus distributed stimulates energy, 
develops talent, comes closer to labor, better defends 
itself and superintends operations by having in each work- 
man an interested observer of both his own and others' 
work. 

2. The Ratio of the amount of Capital to the 
number of Laborers and the ratio of the Increase 
of Capital to the Increase of Laborers must have 
an important bearing on the co-operation of these two 
forces. We cannot too often reiterate, nor too strongly 
emphasize the fundamental principle that Industry is lim- 
ited hy Capital, and that every increase of capital demands 
increase of labor. When the number of laborers is great 
and the amount of capital small, there will be a competi- 
tion of laborers for work. Tliis tends at once to reduce 
the rate of wages and some will fail to obtain employment 
and others will receive barely enough to avoid starvation. 



94 PRODUCTION. 

There is consequently great distress, general discontent, 
and often violent insurrection which aggravates the whole 
dijfficulty. 

On the contrary, when the number of laborers is small 
and the amount of capital great, there will be competition 
among cajiitalists for labor, and the wages or price of labor 
will rise. This may so enhance the cost of products, as to 
make industry in certain lines of production unprofitable. 
Hence capital must wait, unemployed, for an inflow of 
laborers.- This difficulty is more easily relieved than the 
other, because capital invites labor to itself, and a brief time 
will ordinarily adjust the proportions, so that the two ele- 
ments will work harmoniously together for their common 
advantage. 

No universal rule can be given for this proportion. It 
will vary somewhat according to the circumstances of each 
country and the spirit of its people. The age of a coun- 
try, its natural advantages and the general occupations of 
its people must be taken into account. In a newly settled 
country of great fertility, avast amount of land is open for 
cultivation which will yield rich returns for labor expended 
on it. This of itself may serve as a peculiar stimulus to 
labor. But this advantage may be balanced by distance 
from the world's market, and consequent cost of transpor- 
tation and difficulty of obtaining other objects of desire 
than the fruits of husbandry. Generally, however, in a 
new country, occupied by a thjifty people, capital increases 
faster than labor, and there we see always the highest stim- 
ulus to production and the most effective cooperation of 
labor and capital. 

For all countries and for all people, the thing to be 
desired and aimed at is that there shall he labor enough to 
use the capital and capital enough to employ the labor, giv- 
ing it due reward. A perfect balance is perhaps nowhere 
realized, and if once attained it is liable to be disturbed. 



CO-OPERATION OF LABOR AND CAPITAL. 95 

Yet, if labor and capital are free, the flow of each, tinder 
the law of competition, toward an equilibrium, is as natu- 
ral as that of the waters of the ocean under the action of 
gravitation. In the order of nature, undisturbed, there is 
provision for the steady increase of both capital and labor, 
in something like a definite proportion. There is no danger 
of a surplus of either for the whole world, nor for any one 
country, if only the passage is open and free for the out- 
flow and inflow of both and of their joint products. 

In this view, it is evident that the accumulation of 
capital is more for the advantage of the laborer than of the 
capitalist. The greater the ratio of capital to labor, the 
greater will be the share of the product that falls to the 
laborer. The greater the ratio of labor to capital, the 
greater will be the share of the product that falls to the 
capitalist. Hence, the laboring classes are really more 
interested in the increase of the capital of a country, than 
the wealthy classes. When one class of the community 
repine at the prosperity of another class, they repine at 
tlieir own mercies, and the means of increasing their own- 
rate of compensation. 

It is however evident, that the accumulation of capital 
in any nation does not depend simply upon its annual 
production, but upon the iwoportion that its annual pro- 
duction hears to its annual expenditure. A country that 
annually expends all its production, let it produce ever so 
much, will never increase its capital. A country that pro- 
duces ever so little, if it annually expend somewhat less 
than its revenue will be accumulating something ; and 
must in progress of time become richer than its more 
highly favored neighbor. This explains the fact that the 
countries blessed Avith the richest soils and the greatest 
natural advantages, have not generally become the richest. 
The result has within moderate limits been almost the 
reverse. 



96 PRODUCTioisr. 

Hence we see that every mode of unnecessary expendi- 
ture, whether indiyidual or national, by diminishmg the 
annual accumulation of capital, tends directly to lower the 
rate of wages, and thus injure the condition of the labor- 
ing classes. The millions which are wasted and destroyed 
by intemperance^ if saved, would add to the capital of a 
country, and thus increase the demand for labor. All 
unnecessary expenditure for the maintenance of civil gov- 
ernment, has of course, the same tendency. Hence arises 
also, one of the most afiQicting consequences of war. Had 
the almost incalculable sums which Great Britain has ex- 
pended in wars for the last hundred years, been added to 
her operative capital, and but for these wars, it would 
have been so added, all her inhabitants would have found 
■at all times abundant employment, and at a rate of wages 
which would by this time, have banished almost the recol- 
lection of poverty from her shores. 

3. The happy co-operation of labor and capi- 
tal depends on the certainty that each shall 
have its just reward. — Nobody questions the right of 
the laborer to the fruit of his toil. The expectation of 
enjoying some advantage thereby prompts the exertion of 
his powers, and the common sense of men aflBrms that he 
ought not to be deprived of that advantage. The right of 
capital to its reward, though questioned by not a few, 
stands on the same basis of intrinsic justice. Capital is 
but the fruit of previous lahor saved. The labor that pro- 
duced it was like present labor, a cross, endured in expec- 
tation of its acquisition as a reward. To that was added 
the cross of self-denial, by which it was saved instead of 
being expended on some immediate gratification. On both 
grounds its owner justly asks that he shall receive some 
compensation for its use. Since labor can earn nothing 
without capital to work with^ and capital can yield no 



DIVISION OF PKOPERTY. 97 

revenue unless labor be applied to it in actual use, each is 
entitled to its share of the product of their union. Noth- 
ing else so disables industry and hinders the growth of 
wealth as the selfish greed which would rob either partner 
of his reward or make it insecure. To ensure to each this 
certainty of reward, several things are essential. 

a. There must be Division of Property — personal own- 
ership in everything that can by labor be made an object 
of value, and appropriated. "Without this capital cannot 
be.' On common property, men will not labor except on 
the compulsion of force or stern necessity. When prop- 
erty is held in common, every individual of the society to 
which it belongs, has an equal, but an undivided and inde- 
termined right to his portion of the revenue. Hence, 
every one is at liberty to take what he will and as much 
as he will, and to labor as much or as little as he pleases. 
Tliere is therefore, under such an arrangement, y\o''con- 
nedion between labor and the rewards of labor. There is 
rather a premium for indolence than for industrv. In 
such a case there will be no regular labor, if indeed there 
be any labor at all ; and what is still worse, even the scanty 
and spontaneous productions of the earth will frequently 
be gathered before they are ripe, since every one fears 
that, if he do not seize them now, he will never enjoy them 
at all. The forest of an Indian tribe is held in common 
and a few hundred families barely subsist upon a territory 
which, were it divided and tilled, would support a million 
of civilized men. The little that it produces to him is the 
result of division of property. Ilis bow and arrows, his 
wigwam, and his clothing are acknowledged to be, in the 
fullest sense. Ids own. Were tliese to be held, like his 
land in common, the whole race would very soon perish 
from want of the necessaries of life. 

On the contrary, as soon as land with all other prop- 
erty is divided, a motive exists for regular and voluntary 
5 



,98 PRODUCTIOK. 

labor, inasmuch as the individual knows that he, and not 
his indolent neighbor, will reap the fruit of his toil. 
Henceforth he begins to create a regular supply of annual 
product. With increased skill, this annual product in- 
creases, and he begins to convert it into fixed capital. 
Every accession to his fixed capital renders his labor more 
productive, and hence it creates a stronger stimulus to 
increased exertion. With increased exertion, his annual 
capital is increased, and a greater surplus remains to be 
changed into fixed capital. Increased production stimu- 
lates industry, and increased industry results. in more 
abundant production. Thus division of property, or the 
appropriation to each of his particular portion of that which 
God has given to us all, lies at the foundation of all accumu- 
lation of wealth, and of all progress in civilization. 

It is for this reason that property held in common is so 
generally prejudicial to the best interests of a society. A 
common, where every one at will may pasture his cattle, 
and a forest, from which every inhabitant may procure his 
fuel, are encouragements to indolence, and serve to keep a 
community poor. Thus, also, funds left at large for the 
support of the poor, on which every one is supposed to 
have an equal right to draw, have genei-ally been found to 
foster indolence. Poor laws, in so far as they are to be 
considered a fund for this purpose, have the same sort of 
injurious tendency. Societies like those of the Shakers or 
the German Am-a-na, organized for a sort of common fam- 
ily life with common property, seem to prosper. In reality, 
however, these are only joint-stock companies, holding 
and managing property in a peculiar Avay. Their suc- 
cess, like that of any other corporation, depends on the 
fact that the principle of division of property prevails all 
around them and that they are subject to its law. Each 
member simply merges his individual interest in that of 
the community and is represented in the corporation. 



SECURITY TO PEOPERTY. 99 

which, in the eye of the law, is a personality with distinct 
property-rights. 

b. There must he also Security to all Property-rigMs ly 
hotli prevalent moral sentiment and just laws equitably 
applied and faithfully executed. As no one will labor, 
unless he knows that he shall reap the fruit of his toil, so 
no one will take the pains to reap the fruit of his toil, 
unless he also know that he will be able to hold it, and 
appropriate it to the purposes of his own gratification. 
And hence, we see that human labor is exerted in different 
countries, very much in proportion as the right of prop- 
erty is both understood and enforced. 

The right of property may be violated by the Indi- 
vidual or by Society. It is violated by the individual by 
cheating, stealing, robbery, and violation of contracts. 
And, universally, just as these crimes prevail, production 
languishes, industry diminishes, and the richest soil fails 
to support its few and impoverished inhabitants. Such 
Avas the case in Europe, during the era of feudal oppres- 
sion. There was then no encouragement to labor, because 
no one knew whether he, or a baronial tyrant, would reap 
the fruit of his industry. 

Hence, we see the economical importance of means 
which shall prevent the individual violation of the right 
of property. These means are two. 

The first is, the inculcation of those moral and reli- 
gious jirinciples, which teach men to respect the rights of 
others as their own, that is, to obey the law of reciprocity ; 
and which present the strongest conceivable reasons for so 
doing. This is the 7nost certain method of preventing the 
violation of the right of property, inasmuch as it aims to 
eradicate those dispositions of mind from wliich all viola- 
tion proceeds. It is also the cheapest, as it aims at preven- 
tion, which is always more economical than cure. It is 
also necessary, inasmuch as good laws will never be enacted. 



100 PEODUCTIOK. 

or if enacted will never be obeyed, only in so far as there 
exists a. moral character in the community snfl&ciently pure 
to sustain them. In proportion as these are efficacious, all 
other means are needless. Hence, we see the reason why 
moral and religious nations grow wealthy so much more 
rapidly than vicious and irreligious nations. The feeling 
of perfect tranquillity and security, which a high social 
morality diffuses over a whole community, is one of the 
most beneficial, as well as one of the strongest stimulants 
to universal industry. This is one of the temporal rewards 
which God bestows upon social virtue. And, inasmuch as 
no one can enjoy this reward, simply by being virtuous 
himself, but only as his fellow-citizens also are virtuous, we 
see the indication in our constitution, that it is the duty, 
as well as the interest, of every man, to labor to render 
other men more virtuous. 

But second, inasmuch as all men are not influenced in 
their conduct by moral and religious principles, it is neces- 
sary that aggression be somehow prevented, and violations 
of property, in so far as possible, redressed. Hence the 
importance of tvholesome and equitable laics, of an inde- 
pendent and firm judiciary, and an executive, which shall 
carry the decisions of law faithfully into effect. The ex- 
pense necessary for the. most perfect administration of jus- 
tice, is among the most productive of all the expenditures 
of society. Good law, and the faithful administration of 
it, is always the cheapest law, and the cheapest adminis- 
tration of it. The interests of man require that law 
should be invariably executed, and that its sovereignty 
should, under all circumstances, be inviolably maintained. 
, But the right of property may be violated by Society. 
It sometimes happens, that society, or government, which 
is its agent, though it may prevent the infliction of wrong 
by individuals upon each other, is by no means averse to 
inflicting wrong or violating the right of individuals itself. 



SECUKITY TO PEOPEKTT. 101 

This is done where governments seize upon the property 
of individuals by mere arbitrary act, a form of tyranny 
with which all the nations of Europe were, of old, too well 
acquainted. It is also done by unjust legislation ; that is, 
when legislators, how well soever chosen, enact unjust 
laws, by which the property of a part or of the whole is 
unjustly taken away, or what is the same thing, subjected 
to oppressive taxation. 

Of all the destructive agencies which can be brought 
to bear upon production, by far the most fatal is public 
oppression. It drinks up the spirit of a people, by inflict- 
ing wrong through means of an agency which was created 
for the sole purpose of preventing wrong ; and which was 
intended to be the ultimate and faithful refuge of the 
friendless. When the antidote to evil becomes the source 
of evil, what hope for man is left ? When society itself 
sets the example of peculation, what shall prevent the in- 
dividuals of the society from imitating that example ? 
Hence, public injustice is always the proliiic parent of 
private violence. The result is that capital emigrates, 
production ceases, and a nation either sinks down in hope- 
less despondence ; or else the people, harassed beyond en- 
durance and believing that their condition cannot be made 
worse by any change, rush into all the horrors of civil 
war ; the social elements are dissolved ; the sword enters 
every house ; the holiest ties which bind men together are 
severed ; and no prophet can predict, at the beginning, 
what will be the end. 

Hence we see the importance to the industry of a coun- 
try of a constitution which guarantees to the individual 
immunity not only from private, but also from public op- 
pression. Wherever this immunity is wanting, the ]Dro- 
gress of a nation in wealth will be slow. It is owing I'ather 
to the freedom of her institutions and the equity of her 
laws, than to her physical advantages, that Great Britain 



102 PEODUCTIOIir. 

has so far. outstripped all other European nations in the ac- 
cumulation of wealth, and in every thing that confers social 
power. It is almost superfluous, however, to add, that a 
free constitution is of no value unless the moral and intel- 
lectual character of a people be sufficiently elevated to 
avail itself of the advantages which it offers. It is merely 
an instrument of good, which will accomplish nothing un- 
less there exist the moral disposition to use it aright. 

c. There must be for both capital and labor, 'perfect 
Freedom unrestricted hy monopolies or special legislation. 
A special favor in these relations of labor and capital in- 
volves an infringement of freedom on one side or the other 
and that is an interference with natural law, — a hinder- 
ance to the best results. A man's possessions are his tal- 
ents, faculties, skill, and the wealth and reputation which 
these have enabled him to acquire ; in other words, his in- 
dustry and his capital. In order that industry be applied 
to capital with the greatest energy, it is necessary that 
every man be at liberty to use his own as he will ; that is, 
that both of them be free. 

And first, of industry. The aptitudes of men for 
different employments are very dissimilar. The choice of 
every man naturally leads him to that employment for 
which he is best adapted. By allowing every man, there- 
fore, to employ his labor as he chooses, every man will be 
employed about that for which he is best adapted ; and 
hence, the production of all will be greatly increased, be- 
cause we thus avail ourselves of the peculiar productive- 
ness of every individual. Nor is this all. By allowing 
every man to labor as he chooses, we very greatly increase 
the happiness of every individual. And every one knows 
that a man will labor with better success when his labor is 
pleasant, than when it is irksome. 

The case is the same with respect to capital. Every 
man is more interested in his own success, than any other 



FREEDOM TO LABOR AND CAPITAL. 103 

man can be interested in it. Hence, every man is likely 
to ascertain more accurately in what manner be can best 
employ his capital, than any other man can ascertain it 
for him. If every man, therefore, be allowed to invest his 
capital as he will, the, whole capital of a-country will be 
more profitably invested, than under any other circum- 
stances whatever. And since, when he is left thus at 
liberty, there will be the greatest gain to the capitalist, 
there will also be the greatest stimulus to his industry ; for 
the stimulus to labor is always in proportion to the rewards 
of labor. And, on the contrary, in just so far as, by any 
means, this productiveness is diminished, the stimulus to 
labor is also diminished with it. 

It may be said that men, if left to themselves, will be 
liable to invest their capital unwisely. This may be 
granted. Man is not omniscient and therefore this liabil- 
ity cannot be avoided. The question is how shall it be 
rendered as small as possible. Will a man who reaps the 
benefit of success and suffers the evils of failure, be less 
likely to judge correctly, than he whose faculties are 
quickened by no such responsibility ? Nor is this all. 
Not only are legislators who generally assume the labor of 
directing the manner in which labor or capital shall be 
employed, in no manner peculiarly qualified for this task, 
they are in many respects, peculiarly disqualified for it. 
The individual is liable to no peculiar biases in making 
up his mind in respect to the profitableness of an invest- 
ment. If he err, it is because the indications deceive him. 
The legislator, besides being liable to err by mistaking 
the indications, is liable to be misled by party zeal, by 
political intrigue and by sectional prejudice. What indi- 
vidual Avould succeed in his business if he allowed himself 
to be influenced in the manner of conducting it by such 
considerations ? And must not like causes always produce 
like results ? 



104 PEODUCTION". 

Besides, every man feels instinctively that he has a 
right to use his capital and his industry as he pleases, pro- 
vided he interfere not with the rights of another, an-d 
that to restrict him in this use is injustice. We have before 
said, that nothing paralyzes industry like oppression," and 
it is as true in this case, as in any other. If this sort of 
interference be violent or frequently repeated, capital and 
labor, whose motto, like that of Dr. Franklin is, " Where 
liberty dwells, there is my country," will emigrate to some 
more congenial social atmosphere. And if the interfer- 
ence be not so intolerable as to produce these results, yet, 
in just so far as it has any effect, it is all of this kind and 
by its whole operation must diminish the incitements to 
industry. 

And, on the contrary, just in proportion as every indi- 
vidual is free to employ his industry and capital as he 
chooses, and thus both to receive a larger compensation for 
his labor, and also to labor more happily, will be the in- 
ducements to industry and to the investment of capital. 

Hence, we see the mischievous effect of Mono2)olies. A 
monopoly is an exclusive right granted to a man, or to a 
company of men, to employ their labor or capital in some 
particular manner.^ Such was the exclusive right granted 
to the East India Company to import into the ports of 
Great Britain or her territories the productions of all coun- 
tries east of the Cape of Good Hope. Such were the priv- 
ileges granted formerly by Spain to particular individuals 
or companies, of importing foreign commodities into the 
ports of her colonies in South America. The result of 
this exclusion was to prevent all other persons, except 
those thus favored, from investing their capital in this 
manner ; and hence, to reduce the value of that capital by 
precisely the amount of this effect. Nor is this all. Those 
who liold this exclusive privilege, being liable to no com- 
petition, may charge for their commodities whatever they 



FREEDOM TO LABOR AKD CAPITAL. 105 

choose. Here is therefore, a two-fold injustice ; first, the 
means of the consumer are diminished ; and second, the 
pi:ice which he must pay, is enhanced at the mere will of 
his oppressor. 

We see also the impolicy of obliging an individual, or 
a class of individuals, to engage in any labor or to malce 
any investment contrary to their wishes. Thus, we are 
told that during the French Kevokition some individuals 
were punished capitally for raising cattle instead of wheat. 
Men may call this legislation, but the true name for it is rob- 
bery. To oblige a man to raise a crop worth fifteen dollars 
per acre, when he would otherwise have raised one worth 
twenty dollars per acre, is just the same thing as to let 
him do as he pleases and then rob him of five dollars an 
acre afterwards. The wrong is the more intense in the 
former case, inasmuch as it is done under tiie semblance 
of justice, and by men who claim, as the robber does not, 
,that they have the right to do it. Such legislation as this 
"will in any country soon produce a famine. 

Another form of injury under this class is seen in the 
resti'ictions upon industry, formerly, if not now existing 
in many of the countries in Europe, and which certain 
combinations avQ now trying to foist upon free Americans. 
By these regulations artisans were prohibited the exercise 
of more than one trade ; they Avere not allowed to exercise 
that trade unless they had served a prescribed apprentice- 
ship ; nor unless they joined a particular trade-society 
and bound themselves to comply with certain restrictions, 
as, for instance, to sell at particular prices and never to 
employ beyond a certain number of apprentices. The 
result of all this oppression is most iniquitous. It reduces 
the value of skill and industry, the sole estate of the 
laborer ; and places him in the power of those whose inter- 
est it is to reduce the supply as much as possible, in order 
to secui-e to themselves the most exorbitant profit. In 
5* 



106 - PRODUCTIOlSr. 

such cases, a large amount of available industry must be 
kept out of employment, and of course production is to 
this whole amount, diminished. The tyranny of trades- 
unions, though emanating from the people instead of the 
government, produces precisely this effect. 

The same effect is partially produced by any mode of 
legislation, by which, in consequence of favor shown to 
one party, which of course another party must pay for, 
men are obliged to exchange an employment for which they 
have peculiar facilities, for another which they do not pre- 
fer and for which they have not the same facilities. The 
manner in which this would lessen the stimulus to indus- 
try has already been illustrated. Thus, should our govern- 
ment, believing that commerce was more valuable to this 
country than manufactures, lay a tax sufficient to meet 
the expenses of the government upon all American manu- 
factures, in order to increase the amount of foreign im- 
portation, this would drive manufacturers out of business 
and oblige them to become merchants and agriculturists. 
I think that every one must see that this would diminish 
the stimulus to labor throughout the whole country. Men 
would not voluntarily engage in manufactures in prefer- 
ence to commerce, unless they found manufactures to be 
more profitable ; and to oblige them to exchange the one 
for the other, is therefore, to oblige them to leave a more 
productive for a less productive mode of employment. 
By all this difference is the country the loser and the in- 
citement to industry diminished. 

We also see the impolicy of laios regulating consump- 
tion. Such are sumptuary laws ; or those which limit the 
degree of expensiveness in our dress, clothing or equipage.^. 
These were formerly common in Europe. Such also are 
laws which forbid or restrict the expenditure of money for 
the purposes of benevolence, religion, or anything of this 
sort. Every one must see that one of the incitements to 



INTELLECTUAL AND MORAL CULTURE. 107 

industry, is the pleasure which men expect to derive from 
expenditure. Now, if this expenditure be innocent, it 
matters not what sort of expenditure it is. Society has 
nothing to do with it, and it can in no manner interfere 
with it without doing injustice and taking away one of 
the strongest inducements to industry. The only excep- 
tion to be made here, respects expenditures which involve 
vices destructive to the individual and disturbing to the 
peace and order of society. 

After centuries of wrong and mischief, the world is 
opening its eyes to the fact that the business of govern- 
ments respecting the relations of capital and labor is sim- 
ply to protect the rights of each and to hold other things 
in even balance for the free working of natural hiw, — to let 
both alone, giving neither any advantage, but both the 
utmost freedom. They are natural partners, and if not 
interfered with, will spontaneously seek each other as 
birds mate in the spring for a happy, fruitful union. 

4. The General Intellectual and Moral Cul- 
ture of a people is an important condition of the har- 
monious cooperation of labor and capital. In every line of 
industry, intelligence in the laborer adds greatly to his effi- 
ciency. Capital too, is more safely entrusted to such as 
have mind as well as muscle, — who see the relation of means 
to ends and thinJc while they work, — who add to their skill 
in mechanical processes some knowledge of the nature and 
laws of the material and forces with which they work. 

But with reference to the cooperation now under con- 
sideration, it is of the highest importance that both par- 
ties as they meet, should be capable of taking broad views 
of their common interests and mutual dependence. So 
long as the mass of laborers are ignorant and narrow- 
minded and thus greatly inferior to capitalists, the dis- 
tinction of classes is more strongly drawn and there is on 



108 PRODUCTION". 

one side, some temptation to take advantage of the supe- 
rior knowledge, in a way to wrong and oppress the weak 
and dependent ; and on the other side, there is a tendency 
even stronger, in the consciousness of weakness and igno- 
rance, to suspect wrong, to chafe and complain and make 
unreasonable demands, and to rush madly into violent 
measures. Harmony between the two requires mutual 
■respect, and the basis of this mutual respect is self-respect 
on the part of each, which springs from a clear, intelligent 
understanding of relations, rights and privileges. Here 
capitalists as well as laborers need to study first principles. 
If laborers are to be kept in ignorance and held down, as 
a lower stratum of society, then, no doubt, the despotism 
of slavery, the compulsion of force is best adapted to har- 
mony and order in the processes of production. But all 
history shows that under such a regime, there is little 
chance for improvement, little stimulus to progress on 
either, side. Self-interest, as the main-spring of human 
exertion, is, as we have seen, a prime element of the science 
of political economy. It demands freedom for every man 
to make the most of himself, and to do the best for him- 
self. For a wise judgment, choice and action, every man 
needs the intelligence which comes by education. Sound 
political economy therefore, prescribes the free, general 
education of a people by all means which tend to increase 
and diffuse knowledge, as an essential condition of the 
most effective union of labor and capital for the produc- 
tion of wealth. 

Still more important is the moral culture of a people ; 
for on it depends the justice of the laws and the force of 
public sentiment which sustains them, respect for individ- 
ual right, security to property and individual and social 
virtue which alone can make wealth a source of happiness. 
Intellectual cultivation may exist without promoting recti- 
tude and virtue. In this case, however, its only effect is to 



INTELLECTUAL AND MORAL CULTUEE. 109 

stimulate desire, unbalanced by the love of right, until the 
mad passions of men break down the ver}^ structure of society 
and self-interest reduced to pure selfishness, destroys mu- 
tual confidence and cooperation, and reigns supreme in 
anarchy, fatal alike to the production and enjoyment of 
wealth. On principles of political economy, therefore, we 
may advocate also, such means of moral culture as the free 
circulation of the Scriptures and the inculcation of moral 
and religious truth upon the minds of men, through Sab- 
bath-schools and the preaching of the gospel. They have an 
important bearing on the productive energies of a country. 
The argument is very short, but it seems very conclusive. 
No nation can rapidly accumulate or long enjoy the means 
of happiness, except as it is pervaded by the love of indi- 
vidual and social right ; but the love of individual and 
social right will never prevail without the pi'actical influ- 
ence of the motives and sanctions of religion ; and these 
motives and sanctions Avill never influence men, unless 
they are, by liuman effort, brought to bear upon the con- 
science. 

The same principles will defend, on economical grounds, 
the efforts of benevolence on behalf of foreign nations. In- 
telligence, virtue and equitable laws, will have the same 
effect upon other men that they have upon us. They will 
render men industrious, frugal, and consequently rich, and 
raise them from a savage to a civilized state. Just in pro- 
portion as a nation is thus transformed, are its products 
increased ; the riches of the whole world are augmented ; 
the portion of wealth which falls to the share of each man 
is rendered greater ; and the ratio of capital to labor is 
higher. Just as a nation becomes intelligent and rich, its 
wants are multiplied, and the means for supplying them 
are provided. Hence, it becomes a better customer to 
other nations ; it gives an additional impulse to their 
industry ; and it repays them for their products with 



110 PEODUCTIOlf. 

whatever God has bestowed upon it, which will add to the 
happiriess of others. 

Some particular measures for the better harmonizing of 
capital and labor will come up for consideration hereafter, 
in another connection. A few general thoughts on the 
present aspect of the question may fitly conclude what we 
have to say here. It must be acknowledged that through 
greater facility for organization, through false views which 
have gained acceptance in the current usage of business, 
and through mistaken legislation in some things, capital 
has been unduly favored. It has the advantage, and in- 
clines to oppress labor. Laborers have some reason to 
complain and ask for relief. Justice and philanthropy 
require that every man who fears God and loves his fel- 
low-man, should consider the rights involved and lend a 
helping hand to the weak. But, admitting this, it is obvi- 
ous from the view presented, that any measures which 
directly increase jealousy between the parties, any organiza- 
tion which contemplates open war between labor and capi- 
tal, will only aggravate the evil and work damage to both 
sides. Combinations of employers on the one hand to rule 
out fair competition and arbitrarily fix the, wages to be 
paid, — or of laborers on the other, to agree on what they 
will demand, and in general strikes and trades-unions as 
ordinarily conducted, are in this light positively mischiev- 
ous. The great interests of both are common and the true 
relief must come from a better understanding and a con- 
trolling regard for these common interests. 

On the other hand all measures which tend to increase 
the intelligence and promote the thrift and independence 
of laborers and so to inspire them with self-respect and 
confidence as they come into contact and union with capi- 
talists, are helpful. Cooperative associations which gather 
up the scattered capital of many laborers to be used in the 



CO-OPERATION OF LABOE AKD CAPITAL. Ill 

employment of their own industry, and those which are 
designed to favor economical expenditures for the means 
of living and to promote social culture and enjoyment, 
may fitly be commended and encouraged. If capital has 
gained an advantage by special legislation, this is to be 
counterbalanced, not by special legislation to favor the 
other side, by attempts to fix the hours and wages of labor, 
but by earnest united protests against all special legisla- 
tion — by insisting on freedom as the fundamental law of 
productive industry. Freedom to luork and honest pay for 
honest worh well done is the univei'sal maxim of wisdom 
for genuine thrift. The mischief is that thousands are 
studying and struggling all the time, to thrive by the op- 
posite course, reaching on the one hand after the fruit of 
honest work without rendering honest pay, and on the 
other, reaching after dishonest pay for dishonest work. 
The grand correction for this condition of things, is to be 
found in a more sacred regard on all hands to that great 
command uttered by Jehovah at Sinai a few thousand years 
ago, "Thou shalt ]S"ot steal." 

The discussion of the bearing of Protective Duties on 
Production will be deferred, until we have presented the 
laws of Exchange, with which the principle of such duties 
is also most closely concerned. 



CHAPTER X. 

SECOND DIVISION.— CONSUMPTIOK. 

The Nature of Consumption. — All the processes of 
Political Economy contemplate actual gratifications as the 
ultimate end. This end can be attained only by consuming 
the results of production. This is the legitimate Use of 
wealth. Consumption is thus the counterpart of Produc- 
tion. In its widest signification it is tJie Destruction of 
Value. By this is not meant the annihilation of the mate- 
7'ial, but only of a particular form of utility, the prime ele- 
ment of value. Thus, if gunpowder be burned, if bread be 
eaten, if a tree be felled, the particular utility which each 
originally possessed, is destroyed forever. And this destruc- 
tion of value takes place, altogether independently of the 
result which may in different cases ensue, because that de- 
struction is as truly effected in one case as in another. A 
load of wood, once burned, as truly loses its utility, that is, 
its power of creating heat, when it is destroyed in a con- 
flagration, as when it is consumed under a steam boiler, or 
in a fire place, though the result in the two cases may be 
very dissimilar. If bread be thrown into the sea, its utility 
is destroyed, just as much as if it were eaten, though in 
the one case there is no result from the consumption, and 
in the other, it is the means of creating the vigor necessary 
to labor. 

Hence consumption, viewed simply by itself, may be 
considered in the nature of a misfortune. It is the de- 
struction of so much wealth as is consumed. A man, if he 
had his choice, would rather create one product without 



CON^SUMPTIOX OF CAPITAL. 113 

destroying another, or enjoy a gratification, if it were 
possible, without rendering the thing enjoyed useless. 
But, inasmuch as it is the law of our Creator that we shall 
obtain our possessions, and gratify our desires, on no other 
conditions than that of the destruction of value, we have 
no choice. We cannot cut up a hide of leather for the 
purpose of making shoes, without destroying forever its 
utility as a hide of leather. We cannot cut down a tree, 
and saw it into boards without destroy ing forever its utility 
as a tree. We cannot enjoy the pleasure of eating an 
orange, without destroying forever the power in that 
orange of affording to any one else the same plBasure. 
And thus, in general, consumption is one part of an ex- 
change, in which Ave surrender a value with the hope of 
securing a gratification or of obtaining another value. 
Whether the hope be realized or not, the value consumed 
is surrendered, and suri*endered forever. 

When, however, it is said, that the utility consumed is 
destroyed forever, we mean only to speak of this particu- 
lar utility. There may yet remain some valuable quality 
which has not yet been affected. Thus, if a linen garment 
be worn out, its utility as a linen garment is destroyed for- 
ever. It may, however, still possess an important utility, 
as a material for the manufacture of lint or of paper. 
Wood may be consumed for fuel and its utility as fuel may 
be destroyed forever. A quantity of ashes however re- 
mains, which possesses utility for the manufacture of soap. 
Hence we see the importance, in all cases, of entirely ex- 
hausting all the values contained in any product before we 
surrender it up as Avorthless. For the want of this care, 
millions of property are annually wasted. The difference 
between the cost of two establishments, in the one of 
which every utility of every substance is consumed, and in 
the other of which, only the first utility is consumed, is 
frequently as great as the nett profits realized in the ordi- 



114" rONSUMPTION". 

Qary employments of industry. A prominent advantage of 
large manufacturing establishments is that they can afford 
to utilize many minor forms of value which, in production 
on a small scale, would be wasted. 

Forms of Consumption. — 1. Consumption may be 
either of labor or of capital. A mechanic who bestows a 
day's labor upon a table, consumes that amount of labor 
npon it. He also consumes the material upon which he has 
labored. He has received in return the table, and, if his 
labor and capital have been well employed, the result will 
recompense his consumption, both of labor and capital. 
So he who employs laborers to work for him, consumes all 
the labor which he purchases. Hence every day spent is, 
in fact, so much value consumed. If it bring no profitable 
result, it is so much value wasted. 

2. Consumption may be either voluntary or involun- 
tary. It is voluntary when it is effected by design. It is 
involuntary when it is the result of accident. In either 
case, if there be consumption, there is value destroyed. 
The difference is, that, in the one case, there is a profit- 
able result expected ; in the other case there is none. If a 
loaf of bread become mouldy by neglect, its value is de- 
stroyed just as much as though it were eaten. The differ- 
ence is, that, in the one case the loss is total ; in the other 
case the consumption of value creates a power to labor 
which is of more value than the loaf itself. If, for the 
want of a fender, the fire fall out of the fire-place and burn 
the carpet, the carpet is as effectually consumed as if it 
were worn out by use. The difference is, that, in the one 
case it affords a substantial convenience, and in the other it 
affords none. If, by f orgetfulness or neglect, a gate is left 
unlatched, and it is beaten in pieces by the wind, it is as 
effectually consumed as by the wear of several years. The 
difference is, that, in the one case it answers for a long 



FOKMS OF COKSUMPTION". 115 

time tlie purpose of inclosure, in the other case it answers 
no purpose at all. Hence the necessity of care and vigi- 
lance in all the business of life. Almost every thing is 
constantly tending to destruction. Vegetable matter de- 
cays. Animal matter putrefies. Most of the metals may 
he corroded. Almost all our possessions are liable to acci- 
dental destruction, from fire, or flood, from the frosts of 
"winter or the heats of summer. Hence, without our con- 
tinual care, a continual process of consumption will be 
going on, by which our capital will be diminished. 

3. Consumption is either raind or gradual. The con- 
sumption of wood for fuel is rapid. The consumption of 
wood in consequence of the wear of a dwelling house, is 
gradual. But gradual consumption is as sure and as cei*- 
tain as though it were rapid. Hence, in estimating cost 
and expenses, unless an allowance be made for wear and 
tear, our calculations will not agree with the fact. Jf a 
man's furniture be wearing out every year, this average of 
loss is as miich to be taken into account, in estimating 
his expenses, as the cost of the fuel which he consumes. 
Value may be consumed at the very moment of produc- 
tion, as in the case of tlie pleasure afforded by a concert or 
a theatrical exhibition. 

The annual consumption of an individual, is the sum 
total of all the values which he destroys. Hence the 
materials upon which he operates, the tools which he 
wears out, the expenses of his household, both for ma- 
terials and for labor, are all to be reckoned as parts of his 
annual consumption. So, also, the values destroyed by a 
nation, are the national consumption. The exports of a 
country are a part of national consumption, since value 
to the full amount of the exports is abstracted from the 
capital of the country. On the contrary, the imports are 
the product, or what the country receives back again in 
return for its exports or consumption. 



116 C0NSUMPTI02ir. 

Every man in the country is a consumer. Without 
consuming he could not sustain life a day. He must con- 
sume the food which he eats, the clothes which he wears, 
and the dwelling that shelters him. Hence, if one is doing 
nothing directly or indirectly to promote pi'oduction, he 
must be accounted a useless burden upon the community.^ 
If the benefit of his services falls short of the values he 
consumes, he is, by the whole amount of that deficiency, 
an unprofitable member of the body politic. 

Objects of Consumption. — All voluntary consump- 
tion of wealth is for an anticipated good. There are two 
kinds of good on the one or the other of which the con- 
sumer fixes his aim and expectation. The one is the in- 
crease of wealth hy Reproduction. The other is an immedi- 
ate Gratification. Productive consumption requires care, 
skill and labor, while consumption for gratification requires 
neither. Hence ordinarily, productive consumption is not 
itself a pleasure, but consumption for the other object is 
a present joy. 

We can rarely use the same value for these two distinct 
and opposite purposes. If a man consume one hundred 
dollars in amusement, or in ostentation, he cannot have it 
also as capital, to be employed in his trade. And, not 
only can he not have it now, but he can never have it 
again. If it be invested in reproduction this year, it may, 
by next year, amount to one hundred and fifty dollars, 
and the year after, to two hundred dollars, and in twenty 
years it may become five thousand dollars. If it be spent 
on an entertainment, or a journey of pleasure, it is lost, 
and all that it might have subsequently become, is lost 
forever. This should be borne in mind by every man who 
wishes to rise to independence. Every dollar which is 
spent in self-gratification, is so much capital placed forever 
out of his power. And, on the contrary, every dollar 



ECONOMY OF CAPITAL. 117 

which he invests in reproductive employment, may at some 
future time minister to gratification, or it may provide the 
means of much more valuable gratification, in subsequent 
life. 

In order to present the principles of sound economy as 
applied to them we must consider these two phases of con- 
sumption separately. 

1. Consumption for Reproduction. — In treating 
the laws of Production, it has been already shown that 
the creation of values always involves a meeting of Capital 
and Labor in which both are consumed. 

With respect to the consumption of Capital the follow- 
ing economical rules may be laid down. 

a. To produce a given result, the consumption of capi- 
tal should be as small as possible. The ordinary maxim is 
as true as it is common, a petmy saved is a penny earned. 
In estimating the profits of any operation, it is manifest, 
that he who has produced a value worth one hundred dol- 
lars, at an expense of sixty dollars, reaps a profit of twenty 
dollars more than he who has produced the same value at 
an expense of eighty dollars. Thus, the farmer should 
economize to the utmost all his materials. He who saves 
half a bushel of seed in sowing an acre, enriches himself 
as much as though he had reaped half a bushel more per 
acre. It is said that in China, sowing is always done by 
drilling. One of Lord Macartney's suite estimated that 
the saving throughout the whole emi)ire from this im- 
provement is sufficient to feed the whole population of 
Great Britain. The same principle applies to mechanics, 
manufacturers and all consumers whatever. It is, unfor- 
tunately, the case that, from want of care and ingenuity, 
a much larger portion of value is commonly consumed, 
than is necessary for the production required. This is 
especially the case with fuel. Probably not more than one- 



118 CONSUMPTION. 

tenth of the heat given off by wood is rendered service- 
able by nn open fire-place. 

,5. We should employ capital, of no greater value than 
is necessary to effect the production intended. Hence, 
every producer should make it an object of inquiry, to as- 
certain, so far as the present state of knowledge may en- 
able him, in what manner he may effect his purposes by 
the least costly materials. The merchant, on this princi- 
ple, should, before making an exchange, ascertain what is 
the cheapest product at home, with which he will be able 
to procure a given amount of a product from abroad. 
Very much of the success of a producer must, of course, 
depend upon his skill in this respect. The discovery of a 
cheaper dye stuff of equal goodness, or the exchange of 
one export for another, may frequently, of itself, be suf- 
ficient to render a man independent. We do not, of 
course, suppose that any man will be so simple as know- 
ingly to expend more in production than he supposes 
necessary. To guard him against this folly is not our 
object. It is rather to incite every man to a more thorough 
and intimate knoAvledge of the principles on which the 
operation which he conducts, depends. 

c. It is important that every utility possessed by any 
substa7ice be entirely consumed. 

In order to secure this result, attention must be paid 
to two circumstances. First. All the fraymeyits and 
remnants should be, so far as possible, employed to some 
valuable purpose. This principle is Avell illustrated in the 
various tises to which the. horns of cattle are applied. The 
horn consists of two parts, an outward horny case and an 
inward conical shaped substance. The first process con- 
sists in' separating these two parts by means of a blow 
against a block of wood. The horny exterior is then cut 
into three portions by means^of a frame saw. 

1. The loivest of. them, next to the root of the horn. 



ECOKOMY OF CAPITAL. 119 

after undergoing several processes by which it is rendered 
flat, is made into combs. 

2. The middle of the Tiorn, after being flattened by 
heat, and its transparency improved by oil, is split into 
thin layers, and forms a substitute for glass in lanterns. 

3. The tip of the horn is used by the makers of knife 
handles, and of the tops of whips. 

4. The interior or core of the horn, is boiled down in 
water. A large quantity of fat rises to the surface. This 
is sold to the makers of yellow soap. 

5. The liquid itself is used as a kind of glue, and is 
purchased by the cloth dressers for stiffening. 

6. The bony substance which remains behind, is sent 
to the mill, and being ground down, is sold to the farmers 
for manure. 

7. The clippings and shavings are also sold to the far- 
mers for manure, or are used, in small quantities, for the 
manufacture of toys.* 

Now, it is evident that if any part of this material were 
wasted, the cost of the manufactured articles would be 
higher, and the gains of the producer less. And we also 
see that he who first discovered the mode of rendering any 
one of these portions of a horn useful, must, by this single 
discovery, have made himself rich. 

Second. All the values must be consumed in the most 
profitable manner. It frequently happens that a producer 
wants but one value from a substance for his particular 
purpose, while another and an important value remains 
unappropriated. It is always a matter of importance to 
employ, in the best manner, every value which a substance 
is known to possess. Thus, after we have derived from 
wood, all the heat which it can evolve, it leaves ashes, 
which possess an important value. After the oil has been 
expressed from flax seed, the residuum is valuable food .for 

* Babbage on Manufactures. 



ISO CONSUMPTION^. 

cattle. The employment of this utility of course, lessens 
the price of oil, and increases the demand for it. Hence, 
the superiority as to the economy, of large establishments 
over smaller ones. A large manufacturing establishment 
can carry on several distinct operations, for the sake of 
using these secondary utilities. In a small one, this would 
be impossible, and much must in consequence be wasted. 
Thus, in connection with a large slaughter-house, a soap 
and candle manufactory, a manufactory of glue, and one 
of neat's foot oil, may be sustained, while a large number 
of hogs are fattened with the refuse of these several estab- 
lishments. In this manner, every part of the slaughtered 
animal is profitably consumed. In small establishments, 
a large portion of these fragments would be wasted. 

With respect to the Consumption of Labor, true econ- 
omy requires us 

a. To employ precisely as much labor as is necessary to 
accomplish the intended i-esult. We should never employ 
more than is wanted. This generates idleness and negli- 
gence. One supernumerary laborer is not only useless him- 
self, but he generally requires the time of two or three 
others to bear him company in idleness. 

We should never employ less labor than is wanted. 
This produces confusion and destroys the advantages of 
correct division of labor. It saves nothing to employ one 
person less than is necessary in an establishment, and to 
suspend the labor of others several times in a day, in 
order to do the work which that one should have accom- 
plished. 

In general, provided of course, the work be well done, 
the less the consumption of labor the better for the pro- 
ducer. Hence, the economy of labor-saving machinery. 
He who, by an ingenious contrivance, is able to save the 
hire of one laborer, will find himself, at the end of the 
year, richer by precisely this amount saved. 



ECOKOMT OF LABOK. 121 

i. "We should employ labor at no higher price, than is 
necessary to accomplish our object. 

Every important operation consists of several subordi- 
nate operations, requiring very different degrees of skill in 
their execution. According to these degrees of skill, the 
wages of labor are adjusted. Now, economy demands, 
that labor of no higher price should be employed on each 
several operation, than the importance of the operation 
requires. He who is able so to arrange his laborers, as to 
execute, by labor worth fifty cents, what was formerly 
executed by labor worth one dollar, makes a gain of fifty 
cents a day. Thus, in the power-press, the labor of 
press-work which formerly employed two able-bodied men, 
is executed, in part, by animal force, or by steam power, 
and the remainder by women. The reduction in price 
thus effected is very considerable. 

But while this is the fact, it is also the fact, that it is 
never profitable to employ laborers incapable of accom- 
plishing the result. If a particular part of an operation 
require skill and labor worth five dollars per day, it is bet- 
ter to give this price than to confide it to an incompetent 
person who is willing to work for two dollars per day. 
Thus, a good painter of calico patterns, a good calico en- 
graver, or dyer, may be cheaper at five dollars per day, 
than an inferior artist, even if the latter would perform 
the labor for nothing. 

Hence, the importance of an accurate knowledge of 
principles to every one engaged in extensive production. 
It is by deep and thorough reflection upon every part of 
the process which he conducts, that a manufacturer is able 
to keep up with, and especially to add to, the improve- 
ments of the age, and to prevent himself from being un- 
dersold by his more enterprising and intelligent neigh- 
bors. 

c. The lahor paid for, should all be performed. Time, 
6 



123 CONSUMPTION'. 

as it is frequently said, is money. It is surely, money to 
him wlio pays money for it. And, of course, every hour 
for which he pays, that is spent in idleness or useless- 
ness, is so much useless consumption, or so much absolute 
loss. 

The causes of the waste of labor are various. Some of 
the more common are : 

Want of superintendence. It cannot be supposed that 
laborers, if left alone, and if paid by the day, will labor 
as faithfully as if laboring for themselves. Hence the 
necessity and the economy of efficient superintendence. 
He who employs twenty men by the day, to perform a 
particular piece of work, will find that an efficient super- 
intendent will, by preventing idleness, sauntering, and 
story-telling, save much more than his wages. ' Hence, 
commonly, where the labor is of such a nature as to allow 
of it, it is cheaper to pay by the piece than by the day.\ 
In the one case if a laborer be idle he wastes his oivn 
time ; in the other case the time of the employer. It 
is easy to perceive which case is the more favorable to 
industry. 

Irregularity. This is a great source of waste of labor. 
"Where tools are allowed to get out of place, materials to be 
deficient or unsuitable ; or where several laborers ai-e 
obliged to stand idle, to wait for the completion of an 
operation which is done out of season, much time must of 
necessity be lost. In a shop containing a dozen workmen, 
if each one spend, on an average, half an hour a day in 
looking for misplaced tools, or in waiting for materials not 
at hand, this is a loss of more than half the wages of one 
laborer a day. This, in a year, would be sufficient to pur- 
chase the clothes of a small family. 

Defective tools. In order that the economy of labor 
may be as great as possible, the tools by which labor is 
saved, should be as perfect as possible ; otherwise we derive 



ECONOMY OF LABOR. 123 

only a partial benefit from the invention. He who em- 
ploys a man to chop wood, would certainly see the impor- 
tance of furnishing him with a sharp axe. He who erects 
a fence, to save the labor of guarding his cattle, will cer- 
tainly do wisely to keep his fence in good order. It is 
surely less labor to mend a gap in a fence, than to be obliged 
to plant a field a second time, because the grain has been 
destroyed by cattle which that gap permitted to enter. It 
takes less labor to mend a leakage in a mill dam, than to 
rebuild the dam after it has been, by means of that leak- 
age, carried away. Hence the importance of keeping 
every part of an establishment in perfect order, and of 
allowing nothing to be out of repair, if it be possible to 
repair it. 

"I remember," says Say, " being once a witness of the number- 
less misfortunes which a neglectful house-keeping entails. For the 
want of a small latch, the gate of the poultry j'ard was forever open, 
there being no means of closing it externally, and many of the poultry 
were lost in consequence. One day, a fine young porker made his 
escape into the woods, and the whole family, gardener, cook, milk- 
maid, etc., presently turned out in quest of the fugitive. The gar- 
dener, in leaping a ditch, got a sprain that confined him to his bed 
for a fortnight. The cook found the linen burnt that sJie had left at 
the fire to dry. The milk-maid forgot, in her haste, to lie up the 
cattle in the cow house, and one of the loose cows broke the leg of a 
colt, that was kept in the same shed. The linen burnt, the garden- 
er's work lost, were worth twenty crowns, and the colt as much 
more, so that forty crowns were, in a few minutes, lost, for want of 
a latch that would not have cost more than a few sous." [Pol. 
Economy, Book 2d, chap. 5. 

Illustrations of the importance of having every instru- 
ment in order, and in phice, are occurring in most estab- 
lishments every day. They teach us, that economy of 
capita], as Avell as of labor, requires, that every thing 
should be done in time, and in season ; that if a thing 
need to be done to-day, we have no means which shall en- 



124 CONSUMPTION. 

able us to estimate the loss that may ensue by putting it 
off until to-morrow; and, that negligence is as much at 
variance with the laws of our Creator, as absolute waste- 
fulness, inasmuch as it exposes us to equally severe punish- 
ments. 

Supposing now that both labor and capital have been 
invested upon the most economical principles. The ob- 
ject for which they have been invested is the creation of 
products. Hence, the greater this product is, the more 
successful the investment, the better is it for the individ- 
ual, and the better is it for the community. The object 
of the farmer is, with a given soil, a given expenditure of 
labor, of seed and of manure, to raise the greatest amount 
of value, in a harvest. This will generally, though not 
always, be as the quaiitity. Fifty bushels of common 
apples will not sell for so much as forty bushels of good 
ones. One hundred pounds of coarse wool, will sell for 
much less than one hundred pounds of fine wool. Hence, 
his object should be, from a given expenditure, to derive 
the greatest amount of profit. It is by thus adjusting his 
expenditure, and thus calculating the results, that an 
intelligent and thoughtful farmer will grow rich, while 
all around him are remaining stationary or are growing 
poor. 

So, it is the business of the manufacturer to create, 
with a given expenditure, the greatest amount of value. 
If he can succeed in giving to his cloth a better dye, or can 
produce a moi'e durable or a more tasteful fabric, or can 
adapt it better to the satisfying of any human want, its 
value is, by so much increased, and he and the commu- 
nity are the better for the increased value of his produc- 
tion. 

It is evident, that, in order to do this, a systematic 
knowledge of the principles of any employment is neces- 



ECONOMY OF LABOR. 135 

sary to the indiyidnal by whom it is carried on. A man, 
in order to be a skilful producer, must be acquainted with 
tlie laws of production, that is, those laws of nature and of 
society which govern the transaction in which he is en- 
gaged. Hence the importance of accurate knoAvledge, and 
sound mental discipline, to all classes of society. 

We see, in the above remarks, another illustration of 
the truth, that the benefit of one is the benefit of all, and 
the injury of one is the injury of all. If a man economize 
labor and capital, he increases his own wealth, and he also 
rescues as much as he saves, from actual destruction. The 
whole of this amount may go to the further increase of 
production, or to the satisfying of hnman wants. The 
more he produces, the greater is his wealth ; and the 
greater is the value which is created for the good of the 
whole community. 

As it is manifestly for the interest of the individual, so 
is it for the interest of the society, that every producer 
should consume as little value, and produce as great value, 
as possible. Hence the impolicy of those restrictions 
which will not allow the individual to purchase and to sell 
where he pleases. If he must give a higher price than is 
necessary for his material, this is, by the difference, un- 
profitable consumption. If he cannot dispose of it where 
he pleases, this is by so much, unprofitable production, 
because he is unable to realize from his production as 
much as he would be able to realize were he left to him- 
self. . 

2. Consumption for the Gratification of De- 
sire. — Under this head the following kinds of legitimate 
gratification may be enumerated. 

a. Gratifications which pertain directly to the preserva- 
tion of Health and Life. What are called the necessaries 
of life, food, clothing and shelter, are here included. All 



126 co:N"SUMPTioi<r. 

men require these in some form and in some degree. To 
provide all with, a due quota of them is a matter of first 
importance. It is impossible to draw an absolute line of 
demarcation -between necessaries and superfluities. : The 
terms are always used relatively, having respect to climate, 
grade of civilization, occupation, social position, private 
property, — the varying outward circumstances of men: 
and also to the taste, temperament, education and bodily 
health of different persons. For the pariah of India, a 
bamboo hut, a measure of rice and a few yards of cotton 
cloth provide all the necessaries of life. A respectable 
citizen of New York would require values a hundred-fold 
greater to meet his necessities. Yet every man has more 
or less distinctly defined to his own mind, a list of things 
which are for him and his family, necessities, things that 
must be provided and consumed to sustain life, as they 
live. 

b. Gratifications wliicli delight the Senses and Tastes. 
This class, in addition to things indispensable, includes 
delicacies for the table, elegancies of dress and equipage, 
ornaments, beauties of fine art in painting, statuary, archi- 
tecture and music, public exhibitions to please the eye and 
the ear — what are commonly termed Luxuries. The de- 
sii'es which run in this direction are natural. They are 
multiplied and stimulated by individual and social culture. 
Their gratification properly regulated, is elevating and re- 
fining and has the effect indirectly to incite invention, 
quicken industry and increase production. Under the 
exercise of sound economy, means for these gratifications 
may be drawn from the resources of nature, by human 
skill and genius, and may be quite generally distributed. 
It is morally and socially healthful for people of every class 
and condition to enjoy some things which they esteem 
luxuries. The potato-patch will yield no less for tlfe 
beauty of flowers growing on the border. The necessaries 



INTELLECTUAL GRATIFICATIOIS^S. 127 

of the home will be enjoyed with a better relish for a taste- 
ful carpet on the floor and bright pictures on the walls. 

There is need however, to note the danger -of excess and 
aluse connected with this class of gratifications. Appe- 
tites unnaturally formed and unduly pampered, run into 
passions which cannot be satisfied, and lead to indulgences 
which are ruinous to body and mind, producing misery 
instead of happiness. Where objects of beauty, the pro- 
ducts of fine art, ai*e valued only as things that everybody 
cannot have, and minister chiefly to a desire for vain osten- 
tation, they breed discontent, envyings and jealousies 
which are the bane of happiness. Fashion often usurps 
the throne and rules with despotic tyranny in this depart- 
ment of gratiflcation, commanding wasteful and exhaust- 
ing extravagances. The Scriptures therefore justly con- 
demn these excesses and perversions of sense and taste as 
*'the lust of the flesh, the lust of the eye and the pride of 
life." 

The degree to which a person may properly expend his 
means on these gratifications, must depend on the wealth 
at his command, his social position, his culture and his 
true and healthy taste. The desires need to be regulated 
by a due regard to the future as well as to the present 
well-being ; and actual practice should be modified by 
regard to others' well-being as well as one's own. 

c. Intellectual Gratifications derived from the very ex- 
ercise of the mind's powers and the acquisition of knowl- 
edge. The chief outlays here are for books, apparatus, 
experiments, lectures, etc. These affect the higher part 
of men's nature and yield a kind of pleasure exceedingly 
rich and pure, while the consumption of wealth involved 
is very small in proportion to the satisfaction realized. 
All are capable in a greater or less degree of enjoyment 
fl'om this source, and the capacity for it increases as 
provision for it is enlarged. The highest welfare of indi- 



123 CON"SUMPTION". 

Tiduals and of society is promoted by ministering sueh 
gratifications. By offering a fit substitute, they furnish 
the best check to ruinous sensual indulgences. Hence it is 
wise economy to foster desire in this direction by ample 
provision for its gratification. 

d. Social Gratifications through the exercise of hospi- 
tality and all acts of friendliness, and through the varied 
contact of men with one another, in the small circle of 
intimate associates, in festive assemblies and in extensive 
travel about the world we live in. The desire for such 
gratifications springs from the constitution of our nature, 
as beings formed for mutual intercourse and fellowship. 
By them, society is bound together by the most healthful 
and^he strongest ties, and the general happiness is greatly 
proniote.d'i 

' e.- Moral Gratifications through the culture of a good 
congcience to'ward God and toioard men and the exercise of 
benevolence. These involve some expenditures for the sup-' 
port of religious institutions and in the charitable bestow- 
njent of a portion of one's wealth on others for their tem- 
poral relief and their spiritual improvement. They touch 
the noblest and purest capacities of our nature and yield 
■ the richest satisfaction — a satisfaction not limited to the 
mioment of gratification, but abiding for the life-time of 
the soul. This kind of gratification may come within the 
reach of all. The degree of satisfaction is measured, not 
by the grandeur of the religious service, nor by the amount 
of the beneficent gift, but by the sincerity and heartiness 
of the worshiper and the self-sacrificing good-will of the 
giver. 

Some Rules of Economy which apply to consump- 
tion for the gratification of desire are worthy of notice. 
As in consumption for Eeproduction, so here, they resjject 
both capital and labor. 



^ ECONOMY IN GRATIFICATIONS. 129 

A particular gratification having been resolved upon, 
sourid economy dictates tliat the consumption of values be 
as small as is consistent ivith tJie accomplishment of our 
purpos3. This forbids ns to purchase more of any value 
than is wanted. The articles ordinarily consumed in a 
"family, are rapidly destructible. If more be purchased 
than is wanted, it is liable to become useless, and in this 
case, the loss of this excess is total. By having a supera- 
bundance of any thing consumable, it becomes in the eyes 
of those who use it, less valuable, and is used less care- 
fully. And if neither of these results be experienced, if 
an article be purchased a year before it is wanted, the pur- 
chaser loses the interest for a year of the money expended. 
This must be considered in deciding the question whether 
' to purchase supplies by wholesale or by retail. 

By this rule, it is unwise also to purchase any thing 
because it is cheap. If a man oieed any thing, its cheap- 
ness is a reason why he should buy, but if he do not want 
it, its cheapness is no reason at all. A man may buy 
stones vet-y cheap, but it is doubtful whether he would be 
either enriched or made happier by the purchase. Many 
a garret is filled with great bargains, which were pur- 
chased because they were cheap, and then laid away to 
rot. 

Again, the consumption should he as perfect as possible. 
When we have possessed ourselves of a substance, it should 
not be thrown away until every utility which it possesses 
has been exhausted. Thus an article of clothing which 
will not answer any longer for one purpose, may answer 
very well for another. An article of food, which may not 
be used in one form, may be used in some other form. 
•And hence, in general, nothing should come into a house 
unless it be wanted, nor in a larger amount than is 
wanted ; and nothing should leave it until all its utility is 
exhausted. 

6* 



130 cosrsuMPTIO]s^ 

Economy dictates further that all means should be pro- 
vided for the most perfect consumption of values. Hence, 
every useful utensil should be furnished, and should be 
the most perfect of its kind. It is cheaper to buy a coal- 
liod than to carry coal in a basket, and by saving a dollar 
in a utensil, ruin a carpet worth fifty dollars. It is 
cheaper to have every description of culinary vessel that 
may be needed, than to have food spoiled by being cooked 
in an unsuitable instrument. It is cheaper to have a bad 
fire-place altered, at an expense of fifteen dollars, than to 
consume annually ten dollars worth more of wood than is 
necessary. 

Hence, it is also important that every article purchased 
be of such a nature as will admit of the most profitable 
consumption. If a man buy fuel which gives off very lit- 
tle heat, because it is at a low price, it is by no means 
certain that he has made a successful purchase. It should 
always be remembered that we want a given amount of 
utility, and not the mere form in which it seems to reside. 
It is cheaper to purchase a dollar's worth of utility for a 
dollar, than half a dollar's worth for seventy-five cents. 
> The same principles apply to labor. Economy directs 
that in a household we should purchase as much labor as 
we need, and of the kind that we need, but no more than 
we need. AVhen we pay for useless labor, we throw money 
away ourselves. When we employ incompetent labor, we 
pay others to throw it away for us. 

These are the principal considerations which should 
govern our expenditures. And it will be seen that they 
apply to all the conditions of men. Whether our expen- 
diture be large or small, it should be conducted with 
economy. The object to be attained is, to secure as large 
an amount of gratifcatioji, at as small an ex^Mndittire as 
possible. To the man who has but two hundred dollars 
per year to spend, it is certainly important to spend it 



HOUSEHOLD ECOIfOMY. 131 

economically, To the man who has ten thousand dollars 
per year, it will generally be found convenient. 

Hence, it will be seen that in order to enjoy the com- 
forts or the luxuries of life, at the least expense, care and 
s-wperintendence and hnotoledge of the various operations 
performed in a household, are absolutely necessary. And 
as this department of consumption generally devolves 
upon the mistress of a family, we see how important to 
the execution of it with success, must be vigilance, care, 
intelligence and industry. The husband, by the employ- 
ment of capital, labor and skill iii productive consump- 
tion, secures an annual revenue for the purpose of con- 
sumption in the various means of gratification, whether 
necessary or superfluous. The expenditure of this annual 
revenue, or the making of those arrangements which gov- 
ern the expenditure, generally devolves upon the wife. 
If that expenditure be made without economy, either the 
gratifications which it might procure are never enjoyed, 
and by all the consumption, neither comfort nor pleasure 
is obtained ; or else if the gratification sought for be ob- 
tained, it is obtained at an expense absolutely ruinous. 
Hence, it will be seen that the physical comfort, as well 
as the means of happiness of both parties, depends more 
on the domestic education of the female sex than is ordi- 
narily supposed. Affection will rarely exist in the atmos- 
phere of self-inflicted poverty. No man can respect a 
woman, by whose caprice and ignorance of her appropriate 
duties," he is plunged into disgraceful bankruptcy, and 
wedded to hopeless penury. Nor let it be supposed that 
no talent is requisite skillfully to superintend a household. 
Ir. requires at least, as much ability to direct with skill, 
and on principle, the affairs of a domestic establishment, 
as to select a ribbon or dance a minuet, to finger a piano 
or to embroider a fire-screen. 

Sound economy also suggests certain considerations 



133 CONSUMPTION". 

respecting the selection of our gratifications. Where the 
amount of gratification in two cases is equal, it is wise to 
choose that ivhich is the least expensive. The reason for 
this is too obvious to need much illustration. / If a particu- 
lar gratification can be procured for one hundred dollars, 
and another which will afford an equal amount of happi- 
ness can be procured for ten dollars, the cheaper is to be 
preferred ; because, while in this case we obtain an equal 
gratification, we have ninety dollars remaining with which 
to purchase other objects of desire. 

AYhen two modes of gratification are in themselves 
equally productive of happiness, but of which one tends to 
the wealth, and the other to the poverty, both of the indi- 
vidual and of society, the former is to be preferred/) 
Thus, if it cost the same sum to spend an evening in in- 
tellectual improvement that it would cost to spend it in 
a drunken frolic, and the pleasure in the two cases were 
the same, inasmuch as intellectual cultivation tends to 
knowledge, which is a valuable consideration to every pro- 
ducer, and a drunken frolic has no such tendency, econ- 
omy would teach us to spend the evening in intellectual 
cultivation. 

If now we compare the various modes of expenditure 
most common among men, it will appear evident that 
the economy of the moral and intellectual pleasures is 
somewhat overlooked. 

The expenditures for all the real wants and conve- 
niences of a human being, may, by industry and frugality, 
Avithout great difiiculty be supplied. It does not cost 
much to provide all that we need for wholesome and pal- 
atable food, for comfortable clothing and shelter, and for 
all the furniture demanded for convenient domestic ar- 
rangements. Our greatest expenses are for those objects 
which yield no other utility than the mere gratification of 
the senses, or, which are rendered necessary by command 



MOEAL AN"D INTELLECTUAL GKATIFICATION'S. 133 

of fashion, or the love of ostentation. Thus, in the pur- 
chase of a garment or of an article of furniture, a part of 
the price is paid for the real utility which it possesses, and 
the remainder for that particular form, or color, or work- 
manship, which is designated by fashion. Now, it fre- 
quently happens that this latter portion of the price is 
far greater than the former. The same may be said of 
many of our expenses of the table, and of various others. 

Now, that men should not, if they have the ability, in 
any manner gratify their senses, and yield obedience to 
fashion, it is not necessary here to affirm ; nor is it neces- 
sary that political economy should prescribe the limit 
within which these gratifications shall be confined. A few 
considerations, for the sake of illustrating the comparative 
economical advantages of other modes of gratification, is 
all that will be here attempted. 

Moral and intellectual pleasures are by no means expen- 
sive. To spend time in moral cultivation, is no more ex- 
pensive than to spend it thoughtlessly and frivolously. The 
time consumed in thoughtless dissipation, if employed in 
moral culture, would be sufficient to effect great changes 
in our habits and tastes. 

The pleasures of benevolence, so far as pecuniary Con- 
sumption is concerned, are less expensive than those of the 
senses. Were the sums lavished in thoughtless caprice in 
obedience to fashion, or in the gratification of appetite, to 
be reserved for charity, how great an amount of happi- 
ness might be created both in the benefactor and the re- 
cipient. 

The same may be said of intellectual pleasures. Books, 
and all the means for intellectual gratification, may be had 
at an expense within the reach of a very large class of the 
community. The useless ornaments of a drawing room, 
Avould frequently purchase a considerable library. The 
sums of money annually paid by most families, to satisfy 



134 coiifsuMPTioiq-. 

the demands of fashion, would provide them with as much 
reading as they would desire. Now, when these two kinds 
of pleasure are equally set before us, and when the one 
may be procured at so much less expenditure than the 
other, it surely is worth the attention of every man, de- 
liberately to inquire by which mode of investment he will 
best secure his own happiness. There seems something 
ill-adjusted, when the habitation of a moral and intellect- 
ual being reminds us of everything thing else rather than 
that he is either moral or intellectual. 

Moral and intellectual pleasures tend to the wealth both 
of the individual and of society. 

The exercise of benevolence has several important eco- 
nomical tendencies. For instance, it tends directly to cul- 
tivate the habits of self-denial and self-government which 
are so essential both to industry and frugality. Sensual 
self-indulgence tends directly to produce both indolence 
and capricious and reckless expenditure. 

Again, the habit of benevolence tends to moderate and 
correct that intense love of gain, which is so frequently the 
cause of ruin to enterprising men. In the management 
of any hazardous business, he will be the most likely to 
succeed who looks with entire coolness on the chances of 
loss and gain. The too eager, governed by their imagina- 
tion, rush into needless danger. The too cautious allow a 
fair prospect of advantage to pass by unimproved. The 
one is as liable to fail as the other. lie who, by the prac- 
tice of benevolence, has learned a more accurate estimate 
of the blessings of wealth, will more probably than either, 
judge correctly. The miser and the sensualist will fall 
into opposite extremes, one upon each side of him. 

Besides, the social benefits of benevolence are incalcu- 
lable. It unites together the various classes of men by the 
strong ties of affection and gratitude. By bringing all 
classes of men more directly under the view of the whole 



MOEAL AND INTELLECTUAL GKATIFICATIONS. 135 

mass of society, social responsibility is increased, and the 
encouragements to virtue and the restraints upon vice are 
strengthened. Wlien the rich are hard-hearted and luxu- 
rious, the poor are disaffected, anti-social, and destructive. 
In so far as benevolence, therefore, tends to the improve- 
ment of the social dispositions of men, it may lay claim to 
great economical advantages. 

And the same is true of intellectual pleasures. A man 
cannot enjoy these without improving his mind, and ren- 
dering it a more valuable instrument both for the promo- 
tion of his future happiness, and the accumulation of 
wealth. Knowledge is power, in what sphere of life so- 
ever it be exerted. The gratification of the senses ener- 
vates the body, enfeebles the mind, and tends to render 
intellectual exercise unpleasant, and to unfit us for any 
important or highly responsible exertion. 



CHAPTER XL 



PUBLIC COl^SUMPTIOK 

The Nature of Public Consumption. — The gath- 
ering of many individuals into a community gives rise to a 
peculiar class of common wants, which may be termed the 
wants of Society. To satisfy these wants, a part of the 
annual revenue of every member of society is contributed 
in some measure to the public and is expended by the pub- 
lic agents, that is by the Government. 

This expenditure is provided for by means of Taxation. 
When a given sum is to be raised for the accomplishment 
of any object, it is, by some mode of assessment, distrib- 
uted among the various individuals of the community, and 
every one is obliged to pay the proportion with which he is 
charged. The sum thus collected is then, for the accom- 
plishment of various purposes, consumed by public agen- 
cies. The consumption itself is of precisely the same 
nature as that effected by individuals, that is, the value is 
destroyed, the utility consumed is annihilated. If an in- 
dividual burn gunpowder, its value, measured by the labor 
and material by which it was produced, is destroyed ; if a 
hundred or a thousand men do it, the result is the same. 
If a man in the digging of a ditch consume the labor of a 
thousand workmen, and use the provisions necessary for 
their sustentation, the whole value thus expended is annihi- 
lated. And if a thousand men unite in the undertaking, 
the annihilation is the same. , In a word, government is 



PUBLIC EXPENDITURE. 13? 

nothing but a system of agencies ; and property consumed 
by the government, is as really consumed, and its value as 
really destroyed, as though the individual citizens con- 
sumed it themselves. 

l^iow, this being the fact, the rule by which consump- 
tion is to be judged of, is precisely the same, whether it is 
public or private. If the product created by the consump- 
tion, whether that product be material or immaterial, is 
of greater value than the product consumed, it is profitable 
consumption ; that is, the public receive in return a 
greater value than they parted with. If a less valuable 
product be created than is consumed, it is unprofitable 
consumption, and the value might better have remained in 
the hands of individuals. If no product whatever be real- 
ized, it is a total loss, and the value taken from the indi- 
viduals might as well have been thrown into the sea. Nay, 
had they themselves thrown the value consumed into the 
sea, there would liave been a gain, as the expense of col- 
lecting and consuming it would have been saved. And 
still more, if the value consumed produce no valuable 
results, but on the contrary, be employed to promote the 
purposes of oppression and misrule, the evil is enormous. 
The possessions of the individual are taken away, not only 
without rendering him an equivalent, but for the sake of 
employing other men to torment, and deprive him of his 
dearest rights. 

It is frequently asserted, that public expenditure en- 
riches a country, or that at least, it is wholly innocent, 
since it quickens the circulation of money, and does no 
harm, inasmuch as all the money always remains in the 
country. To obviate such an objection, let us trace, from 
first to last, the passage of a product toward ultimate con- 
sumption on the public account. 

" The government exacts from the tax-payers, the payment of a 
given sum in the sliape of money. To meet this demand, the tax- 



138 COKSUMPTIOX. 

payer exchanges part of tlie products at his disposal for coin, which 
he pays to the tax-gatherer. A second set of government agents is 
busied, in buying witli that coin, clothing and other necessaries for 
soldiery. Up to this point, there is no value either lost or consumed ; 
there has only been a gratuitous transfer of value and a subsequent 
act of barter, but the value contributed by the citizen still exists in 
the shape of stores and supplies in the military depot. In the end, 
however, this value is consumed, and then the portion of wealth 
which passes from the hands of the tax-payer into those of the tax- 
gatherer, is destroyed and annihilated. 

' ' Yet it is not the sum of money that is destroyed ; that has only 
passed from one hand to another, either with or without any return, 
as when it passed from the tax-payer to the tax-gatherer ; or in ex- 
change for an equivalent, as when it passed from the government 
agent to the contractor, for clothing and supplies. The value of the 
money survives the whole operation, and goes through thr.^e or four, 
or a dozen hands, without any sensible alteration. It is the value of 
the clothing and neeeasaries that disappears, with precisely the same 
effect as if the tax-payer had, with tlie same money, purchased cloth- 
ing and necessaries for his own private consumption." * 

Consumption, then, is of the same nature, whether it 
be public or private. It is a destruction of value ; and 
the rule by which we are to determine whether it be profit- 
able or unprofitable, is the same in both cases. It is by 
inquiring, whether the benefit created by the consumption 
is greater than, equal to, or less than, the value of the pro- 
duct consumed. 

While, however, this rule is always to be adopted, it is, 
as in the case of individual consumption, to be interpreted 
with a liberal and intelligent forecast. It must not, of 
course, always be expected, that the product created by 
consumption, will be a visible, tangible, material sub- 
stance. Thus we see no physical, tangible product, as the 
result of taxes for the support of civil government. But 
we receive the benefit in security of persons, property, and 
reputation ; or in that condition of society which, though 

*Say. 



PUBLIC EXPENDITURE. 139 

it be incapable of being -weighed and measured, is abso- 
lutely essential both to individual happiness, and individ- 
ual accumulation. The same may be said, in substance, 
concerning the taxes paid for general education. Here, 
whether the tax-payer receives his remuneration in instruc- 
tion given to his own children, or not, he yet receives it, 
in the improvement of the intellectual and social character 
of his neighbors, by which his property is rendered more 
secure, the labor which he pays is better performed, and 
the demand for whatever he produces, is more universal 
and more constant. The same may be said of that public 
expenditure by which the moral and social character of a 
community is elevated, the taste of a nation refined, and 
an impulse given to efforts for the benefit of man. With 
this view, no one could oppose the expense incurred in be- 
stowing upon public edifices elegance, or even, in some 
cases magnificence of structure ; in the public celebration 
of remarkable eras ; and in the rewards bestowed upon 
those who have by their discoveries enlarged the bound- 
aries of huinan knowledge, or by their inventions, signally 
improved the useful arts. Political Economy is opposed 
to none of these forms of expenditure ; all that she requires 
is, that a valuable consideration be received in return for 
the consumption ; and that the consumption be not dis- 
proportionate to that consideration. 

The principles and methods of Taxation come more 
properly under the head of Distribution and will be dis- 
cussed in our third Division of the science. 

The Purposes to -which Public Consumption 
is properly applied may be specified as follows. 

1. For the Support and Administration of Government. 

This is by far the most necessary of any of the objects 
of public expense. Without government there could be 
no society, and without society, there could neither be re- 



14:0 CONSUMPTIOIf. 

•dress of wrong, nor security of property. But government 
<3annot be administered without officers, and no one will 
devote himself to the discharge of the duties of civil office, 
unless he be paid for it. 

The principles which should govern this branch of ex- 
penditure, afB few and simple. 

Economy requires that precisely such talent should be 
employed, in the various offices of civil government, as 
may be necessary to insure the discharge of the duties of 
each office in the best possible manner. Many of these 
offices can be discharged successfully, only by the first 
order of human talent, cultivated by learning and disci- 
pline, and directed by incorruptible integrity. Now it is 
certainl}'^ bad economy, to employ inferior talent to do 
badly, that which can be of service only when it is done 
well. 

Hence the salaries of judicial, legislative, and executive 
officers should be such as will command the service of such 
talent as the duties of each office require. It is most un- 
wise parsimony, to give to a judge such a salary as will 
command the services of nothing more than a third rate 
lawyer : and it is mean to ask an individual to do a ser- 
vice for the community, at a lower rate than that at which 
he would do it for an individual. 

In answer to this, it may be said, that by bestowing 
large salaries upon the officers of government, we present 
temptations to avarice. But the reduction of salaries by 
no means diminishes the evil. Were emolument to be 
reduced, there would always be a contest for office. The 
only question then is, whether we shall have the contest 
between men of liigli or between men of loiv character ; 
between those who are capable of serving us to our advan- 
tage, or those who are only capable of serving us to our 
disadvantage. Were the most important trusts in the 
government to command no higher salaries than the wages 



EXPENDITURES FOR CIVIL SERVICE. 141 

of day laborers, there would be as great competition for 
them as at present ; only then, the great contest Avonld be 
between day laborers, instead of being between men of 
professional ability. 

Here, however, the general principles of wages should 
have their full effect. For instance, where an office con- 
fers rank or dignity, or indicates professional eminence, 
the emolument should be less than would otherwise be 
paid for the same amount of service. Again : when an 
office is permanent, the emolument should be less than 
when it is temporary. But on the other hand, if it be in- 
sisted upon, that neither rank nor consideration shall be 
allowed to the public officer, but that all men are and 
must show themselves to be on a level, the remuneration 
of office should be higlier. And also, when an office is 
temporary, and the having held it, disenables the incum- 
bent for subsequent professional employment, the remu- 
neration should rise accordingly. In such cases a pension 
should be attached to the office, if its duties for a given 
time have been faithfully discharged. 

Altogether at variance with these principles is the prac- 
tice of making appointments to civil office as a reward for 
partisan jjoUtical activity, or from personal relationship or 
attachment, without regard to fitness for the duties. Con- 
sidering the amount and variety of service needed and the 
responsible trusts involved, true economy, which always 
means efficiency in the administration of public aSairs, 
demands that in the civil, as in the military and naval 
service, there should be a preliminary training, tested by 
thorough examinations, and a regular system of promotions 
according to merit and time of service, with emoluments 
sufficient to encourage permanence and fidelity. When in 
these matters, the science of Political Economy shall sup- 
plant the chicanery of Party Politics, the nation will be 
saved millions of wealth as well as the mischief and shame 
of abounding corruption. 



143 coNsuMPTio]sr. 

2. Expenditures for Worhs of public Convenience and 
Advantage, commonly called Public Improvementsy In 
this category are included such items as paving, cleaning 
and lighting the streets of a city, providing water-works 
and sewerage, constructing roads, canals and railways, im- 
proving harbors, building and sustaining light-houses, 
making surveys for the safety of navigation, clearing the 
channels of rivers and raising dykes or embankments to 
keep rivers in or to keep the sea out. (The main feature 
of all these works is that iloey confer benefits uponthe entire 
community. They also involve an exercise of the right of 
eminent domain, that is, the right of a government, under 
certain circumstances and on equitable conditions,- to take 
private property for public use. 

Some of these works are of such a nature, and such is 
the benefit they yield that it is impracticable to derive 
any income from the capital expended. Hence tliey must 
he provided for by public funds. Others of them come 
within the scope of private enterprise, and under wise 
management, may be made to yield a fair profit on the 
capital invested, by charges for their use. Many writers 
affirm therefore, that a government should never assume 
any of these works which individuals are willing to under- 
take. But private enterprise can do nothing with them 
without action of the government authorizing the works 
and conferring privileges and powers for their construction 
and management. There is danger that these powers will 
be abused for selfish interests, in disregard of the public 
good. Some of them also, like the Pacific railway, are of 
too great magnitude for private enterprise unaided, and it 
may be wisest and best that the government should con- 
trol those works to which it must contribute aid. Eecent 
experience with some of our great railway corporations 
gives much weight and importance to these considerations 
and complicates the question as to what should and what 



PUBLIC IMPEOVEMENTS. 143 

should not be undertaken directly by the government. 
Without entering into the discussion of this question here, 
we mtiy say that, in the light of political economy, it is 
evident that the interests of the 'wUole public should always 
take precedence of all private interests, and that a, govern- 
ment should never, hy any grant or charter, alienate its 
rigid or its power to guard and serve the public interests 
as they are concerned in these luorJcs. 

3. Eapenditnres for advancing Science and di'ffusing 
Intelligence for common interests. This class of expendi- 
tures is closely allied with that last referred to, but it 
deserves a distinct notice. It embraces exploring expedi- 
tions to remote and unknown parts of the earth, expedi- 
tions to localities most favorable for important astronomi- 
cal observations, geological surveys, coast surveys, meteor- 
ological observations, entomological investigation, and the 
whole post-office system as a means of diffusing intelligence 
and promoting social intercommunication. Some of these 
expeditions do not contemplate a present imperative need, 
nor an immediate pecuniary advantage, but they do all 
yield broad, general benefits, of the highest importance 
even in their economical aspect, which justify the judi- 
cious application of the public funds to provide for them. 

In a thickly populated country of limited extent, a 
postal system may be made self-sustaining by a very low 
charge for the service rendered, and might be maintained 
by private enterprise. But no doubt, it is even then safest 
and surest under the control of the government. In a 
country like ours, however, so broad, and in many parts so 
thinly inhabited, it must be maintained by the government, 
and the common interest justifies a low rate of postage, 
though for a time, it may make considerable drafts on the 
public treasury. The time is, probably, not far distant 
when a like common interest in the use of the magnetic 



144 COXSUMPTIOIT. 

telegraph, as a means of communication, will require the 
government to connect it directly with its postal system. 

4. Expenditures to promote the General Ed^ication of the 
people. This is a proper object for national expenditure, 
because the prosperity of a country depends very much on 
the general intelligence of its population. General educa- 
tion causes industry to be more intelligently applied and 
makes it more effective. It brings labor and capital more 
nearly upon a basis of equality, as they meet for mutual 
contracts and cooperation, and guards against the disturb- 
ing outbreaks of ignorant and unreasoning masses. It 
qualifies all to discern what are their best interests, and 
wisely and firmly, without violence, to stand for those in-' 
terests in the sharp competitions of industry and trade. 
It is for every man's interest that he have intelligent men 
to associate and to deal with. 

A system of public education must provide free schools 
open to all classes, in which children may be taught to 
read and write with accuracy their vernacular language, 
to use numbers freely and correctly in their various com- 
binations as involved in the ordinary transactions of busi- 
ness, and to master the elementary facts of geography, 
history and science, essential as a beginning of that gen- 
eral information in the acquisition and use of which the 
mind should be growing through all the years of after life. 
No doubt there are communities in which the full benefit 
of such a system can be secured only by making attendance 
compulsorij ; but in general, a prevalent popular sentiment, 
such as is formed by the presence and influence of good 
schools, will be found better than direct legislation to 
bring the children of all classes under instruction. 

Many of our American states are provided with general 
school funds which yield an income devoted to sustain a 
system of public education. These are rarely sufficient to 



EXPEKDITUEES FOR EDUCATION. 145 

provide for the entire expense of schools ; nor is it best 
they should be, since a local interest in each school is 
more likely to be sustained when the people themselves 
contribute something for their support. For the distribu- 
tion of these general funds, a rule which seems wise is 
commonly adopted, making the amount of appropriation 
to each district depend upon the amount of tax levied in 
the district, as well as upon the number of scholars. To 
make the system complete, it seems necessary, that every 
district sufficiently large to maintain a school, should be 
obliged to maintain one, and that for this purpose, the 
necessary funds beyond what the general school-funds may 
furnish be raised by the authority of the public from the 
district. When, however, these funds have been raised, 
they may safely be left in the power of each district itself, 
in the belief, that those Avho have themselves earned and 
contributed the money, will be more likely than any other 
persons to disburse it skillfully and economically. Besides 
this, as upon such a system, teachers will be wanted in 
large numbers, it may be desirable that normal-schools be 
established for the special purpose of educating them. 
This will give uniformity to the system of instruction, and 
enable the science of education, throughout a whole com- 
munity, the more easily to keep pace with the progress of 
science in other departments of knowledge. 

There can be no question, that the safety and best 
good of society, economical as well as moral, require the 
state to provide for the gratuitous education of all classes 
in the rudiments of Icnoidedge. How far beyond this, the 
public system should be extended, and especially whether 
the state should set up and maintain by general taxation, 
liiglier institutions such as colleges and iiniversities, to 
make a scientific and professional education also gratuitous, 
is a question which demands the thoughtful consideration 
of the economist, the statesman and the Christian. We 
7 



146 CON'SUMPTION'. 

can offer here only a few thoughts bearing on that ques- 
tion. No doubt, it is for the advantage of the whole state, 
that some of its citizens should be well trained to become 
leaders of thought and influence in society. It is clear also 
that the actual expense of a thorough liberal education is 
so great that if, by charges for tuition, raised to the full 
measure of the cost, the burden of giving their own chil- 
dren its advantages were thrown entirely upon parents, only 
the children of the rich could enjoy the privilege. On 
the other hand, it is evident that feio comparatively can 
enjoy the direct benefit of these institutions and it seems 
unjust that the whole community should be heavily taxed 
to make these advantages gratuitous for thefeiu. Under 
the control of the state, such institutions must be more or 
less involved in the conflicts of political parties, in a way 
unfavorable to the most successful prosecution of their 
work. Under such control also, it is difficult, not to say 
impossible, to adjust the treatment of moral and religious 
subjects, which cannot be excluded from a course of liberal 
education, so as to satisfy all. Moreover, it is healthful 
for a people that wide scope be given for the action of 
private leneficence in endowing institutions of learning; 
and the education that costs the young man and his 
parents and friends some direct sacrifice, is most likely 
to be appreciated, made thorough in its processes and 
turned to good service in its practical use. Experience in 
our country has shown that institutions so established and 
maintained, do send forth men well fitted to lead and mold 
public opinion and to make the learned professions strong 
and influential for the highest welfare of society. They 
deserve, as they have received, the fostering care of the 
state. 

The importance of this work of higher education, as a 
conservative power for the industrial, social and moral 
well-being of a people, cannot be overestimated. The 



EXPENDITURES FOR EDUCATION. 147 

gOA^emment needs to foster and sustain it by every legiti- 
mate means. The main question is simply whether or not 
"the state shall undertake by general taxation to build up a 
public university to be conducted under its own control. 
This question demands a broad, candid and disinterested 
discussion. 

5. Expenditures for the care of classes afflicted iy pecu- 
liar calamities or Deprivations. Under this head, are 
contemplated chiefly hosj)itals for the insane, institutions 
in which the deaf and dumb, the blind and the feeble- 
minded, may, by peculiar processes of education, be fitted 
to become useful and happy members of society. Our 
common sympathies and benevolence dictate that such 
means for relief of the unfortunate should be provided. 
Evidently, they can be most economically provided by the 
state. The benefits also must be very largely gratuitous, 
because such calamities come in the largest proportion upon 
the poor. LavisJi^ expetiditures, in this exercise of public 
beneficence are, however, to he deprecated. Institutions 
may be set up and carried on in a style so costly as need- 
lessly to increase the burdens of taxation and to be a dis- 
advantage to their inmates, accustoming them, for a brief 
period, to luxuries which tend to make them, in after-life, 
discontented with their plain homes. A wise frugality 
needs to be observed even in the exercise of charity, both 
by individuals and by the state, that means may be exactly 
adapted to their end. 

6. Expenditures for the Relief of Poverty. To relieve 
the sick, the destitute, and the helpless, is a religious duty, 
and therefore should, like every other religious duty, be a 
.voluntary service. Hence, charity in a moral and reli- 
gious community, should generally be dispensed by individ- 
uals from their own resources, or from the resources of 
voluntary associations. 



148 CONSUMPTION. 

Nevertheless, as cases frequently occur which could not 
with sufficient promptness, be relieved by the aid of indi- 
viduals, or in which the burden would press too heavily 
on the most charitable, it may be proper that some 
public provision should be made for the relief of those 
whom old age, or infancy, or sickness, or sad calamity has 
deprived of the power of providing the means necessary 
for sustenance. , 

By far the greater number of persons requiring such 
aid, are, however, capable of some labor, and are also pos- 
sessed of some skill. They are also far happier, when en- 
gaged in suitable labor, than when idle. It is therefore, 
the dictate of benevolence, as well as of economy, to pro- 
vide them with means of profitable occupation. This 
labor and skill, if judiciously employed upon capital, will 
commonly defray the expenses of the support of paupers. 
Hence, the best, method of relieving the poor, is to provide 
some establishment furnished with sufficient capital, in 
which all the poor who need assistance may be employed 
and supported. In many cases in New England and New 
York, farms have been purchased by towns or by counties 
for this pui'pose. It has generally been found, that 
the only expense necessary to be incurred, is the pur- 
chase of the farm, or the first investment of the capital. 
The establishment after this, under judicious management 
has generally paid its own expenses and, in some cases, it 
is said, has even yielded a revenue to the public. The ex- 
penses of pauperism, if they be defrayed in this manner, 
must of necessity ^e very moderate, while a competent and 
convenient provision may be made for every individual 
who actually deserves assistance. 

7. Expenditure for the Nation^s Defence. The first 
duty of a government is to maintain its own life and give 
full protection to all its subjects, in the enjoyment of their 
rights. If justice and benevolence universally prevailed. 



EXPElirDITITEES FOE DEFENCE. 149 

this would be an easy task. But the world is yet far from 
witnessing the full prevalence of these principles. Hence, 
every nation is liable to be assailed by enemies from with- 
out, and to be convulsed by insurrection and rebellion 
within its own borders. Exigencies will thus arise, when 
nothing but military force will save a nation's life. True 
economy therefore, dictates that provision be made for 
such exigencies by due appropriations for armies, navies 
and the munitions of war. When the necessity comes 
and war is inevitable, then no expense is unreasonable 
which is necessary to prosecute it with the utmost vigor. 

Yet, it must be remembered that war is always de- 
structive, terribly destructive of both wealth and men who 
produce wealth. In the history of the world, thus far, 
much the largest part of national consumption in all coun- 
tries, has been for this purpose. This is attested by the 
millions upon millions of public debt with which all 
nations are burdened, the greater portion of which were 
incurred in wars. In view of these facts, it certainly be- 
hooves all statesmen, all patriots and all philanthropists 
to favor to the utmost that conduct in the intercourse of 
nations which will be so frank, so true, so just as to arrest 
jealousies and disputes ; and to further all measures 
which may lead to the settlement of controversies where 
they arise, by arbitration rather -than by arms. The varied 
industries, the expanding commerce and the improving 
moral sentiments of the nations, on the one hand, and the 
ever increasing expensiveness of wars on the other, present 
hopefiil signs that the era is approaching when social and 
moral forces will be more effective than military forces to 
guard the life of nations and keep the peace of the world. 
God speed the good day ! 

With reference to the whole range of public consump- 
tion, sound economy dictates two plain and simple rules. 



150 COKSUMPTIOIir. 

1. The Style and Scale of National Expenditures 
sliould he such as to command the respect and honorable 
pride of the people without useless display. 

2. The Methods of National Expenditures should he 
such as to hold all the agents of government to a direct and 
particular responsihility and to ensure the utmost fidelity 
in the discharge of all trusts. 



CHAPTEU XII. 

THIRD DIVISION.— DISTRIBUTION. 

The Scope of this Division. — We have seen that 
in order to the production of wealth, labor must be joined 
with capital ; also that various kinds of labor and divers 
forms of capital are involved ; and further, that in every 
process of production, there must be a consumption of 
both labor and capital, out of which new forms of wealth 
appear with increased value. In some cases, the same 
person both owns the capital and performs the labor. 
More commonly, however, those who labor, work with 
capital which belongs to others. In all cases, the profits, 
that is, the actual increase of value, can be properly 
estimated only after due allowance is made for capital 
consumed, and for the reward of both laborers and 
capitalists. 

Moreover, the general productive industry of a people, 
in its wide range, includes, as we saw, many kinds of labor, 
such as that of the learned professions, which are indi- 
rectly, yet really concerned in production. Evidently, the 
compensation of all such labor must be derived from the 
results of production, and must be adjusted to some defined 
and recognized principles. < 

It is obvious also, that the protection of good govern- 
ment, giving security to persons and property, is essential 
to prosperous industry, and that the means for the support 
of the government must be drawn from the proceeds of 
productive industry. This item, therefore, must be in- 



15.2 DISTRIBUTION. 

eluded with those just named in the estimate of expenses 
of production. 

Then beyond these, is the surplus of wealth produced 
over all consumed, that is, the profits, the anticipation of 
which is the chief stimulus to industry and enterprise. 
The question, to whom and in what proportion shall these 
profits be assigned, is one of prime importance, for the set- 
tlement of which our science should define some fixed 
principles. All of these matters are properly embraced 
within the range of this third division of our subject, 
which may be defined thus : 

Distribution is that department of Political Economy 
wMch determines the principles on which the proceeds of 
industry are divided among the parties concerned in their 
production. 

The Parties to be Recognized. — In any branch 
of industry and in the general productive industry of a 
nation, three parties are to be considered. First, the 
Laborers of all grades wliose energies, physical and mental, 
are directly or indirectly engaged. Second, the Otvners 
of the Capital, which is the fruit of past labor, saved and 
now combined with present labor for a joint result. 
Third, the Govermnent which draws on the proceeds of in- 
dustry generally, for its own maintenance, with a view, 
alike to the security of the rights of all in the pro- 
cesses of production, and to the highest happiness of 
all in the enjoyment of its fruits. In the* cases before 
referred to, where the laborer combines in himself muscu- 
lar power, acquired skill, inventive genius and managing 
capacity, and works on his own capital, the entire proceeds 
of his labor must go to him, subject only to the claims of 
the government. But even then, it is easy and it is well, 
agreeably to the principles of distribution, to set down one 
portion of the proceeds as compensation for the use of 



SUBDIVISIONS. 153 

capital, another portion as the rey^ard of simple labor, and 
yet another as a premium for the wise management of the 
business. 

This department naturally resolves itself into four sub- 
divisions which will be treated in their order. 

1. The Remuneration of Labor. 

2. The Remuneration of Capital. 

3. The Distribution of Profits. 

4. The Revenues of the Government. 



CHAPTER XIII. 

THE EEMUNEEATION OF LABOR. 

Terms used.-^The compensation of labor is repre- 
sented by several terms which correspond to different 
kinds of labor. The term most common and applicable 
to the greatest number of persons is Wages. It means the 
stipulated reward for services rendered, rated either by the 
time occupied, as when men are paid by the day or month, 
or by the work accomplished, as when men are paid by the 
piece, — so much for each article made. This term is ap- 
plied especially and chiefly to manual labor of all grades, 
including simple labor in which little more than muscular 
strength is required, and skilled labor which involves intel- 
ligence and training. It presupposes the relation of 
employers and employes, bound by a mutual stipulation 
or contract which may be varied or terminated on short 
notice. 

The term Salary expresses a fixed sum of money to be 
reckoned usually by the year, for services which ordi- 
narily involve some brain-work and responsible trust. 
Thus in a large manufactory, while the mass of laborers 
receive wages, the book-keeper, the cashier, the superin- 
tendent and the general manager, who may be the presi- 
dent of the stock-compan\^, have salaries. The compensa- 
tioti of clergymen, teachers and civil officers is commonly 
adjusted in this form. Generally, the term implies an 
engagement of some permanence, and a grade of service 
requiring special qualifications and previous education. 

In some kinds of business, agents are employed whose 



EEMUXEEATION OF LABOR. 155 

labors are compensated by Commissions, that is a certain 
rate per cent of the value involved in each transaction. 
Thus brokers, or persons engaged in the purchase of stocks, 
real estate, etc., insurance agents, collectors of debts, trav- 
eling clerks who solicit orders of goods for mercantile or 
manufacturing establishments, are compensated for their 
labor by stipulated commissions. In this case, the em- 
ployer or the party who engages the service, makes him- 
self responsible only for what is actually done, and the 
agent's reward will depend very much on the enterprise, 
tact and fidelity with which he prosecutes his work. 

Lawyers, physicians, and certain civil officers are re- 
munerated by Fees. This form of compensation originated 
probably, in the gratuitv formerly offered for a service 
rendered, by the party benefited. Hence there has always 
been more or less of indcfiniteness connected with this 
mode of remuneration. It is adjusted for each particular 
service, at rates determined in part by usage and in part 
by the arbitrary demand of the party rendering the service, 
or by the good-will of the party served. 

From the mere statement of these distinctions, it is 
evident that the questions respecting wages involve the 
most difficult problems of distribution, and must therefore 
command our first and chief attention. Mr. Francis A. 
Walker, after limiting the wages-class to " persons who 
are employed in production with a view to the profit of 
their employers, and are paid at stipulated rates," esti- 
mates that " of English-speaking people, three-fourths 
probably, two-thirds certainly, subsist on wages." They 
compose the class who without resources and defences of 
their own, stand exposed to the operation of laws which 
are, in their very nature, fixed, and which work with a 
kind of relentless severity. 

Before attempting to state the laws which govern the 
rate of wages, we need to notice some important distinc- 



156 DISTRIBUTION". 

tions, the neglect of which often causes error and confu- 
sion in the discussion of this subject. 

Nominal and Real Wages. — The rates of wages 
are usually stated in terms of money. This money-rate is 
what is meant by nominal wages. But, as actual remun- 
eration of the hired laborei', wages are measured by the 
necessaries, comforts and luxuries of life which they will 
command. Real wages are so estimated. It is of the 
highest importance to observe this distinction, in compar- 
ing the rates of wages in different countries, or at different 
periods. The money which a skilled mechanic in Eng- 
land receives for a day's work is much less than that re- 
ceived by one of the same class in the United States. But 
actual investigation shows that the English workman's 
smaller pay will bring him the larger quota of those things 
which minister to the enjoyment of life. In our country, 
the wages of a common day-laborer in 1843, were one dol- 
lar per day ; in 1865, the nominal rate was doubled. Yet 
the low rate of 1843 would secure for him full one-third 
more of articles necessary for .his comfort, than the double 
rate of 1865. 

Several causes operate to produce this difference. 

1. The most influential of all is the Fluctuations in the 
purchasing power of money, under sudden expansions and 
contractions of the currency. An increased production of 
gold and silver, at times, has added suddenly to the money 
of the world. In former times, sovereigns used to debase 
the coin of their realms, in order, for their own advantage, 
to make out of the same weight of gold and silver, twice as 
much money. And in modern times, the invention of • 
paper substitutes for coin, especially when issued as incon- 
vertible government-notes, has done more than all else to 
produce sudden expansions of that which passes as money. 



KOMIKAL AND REAL WAGES. 157 

Any such increase of current money soon shows itself in 
a diminished purchasing power, that is in enhanced prices 
for all commodities. The worst mischief of such fluctua- 
tions falls upon those whose living depends on wages. 

It may be said that with the advancing price of com- 
modities, wages also rise. This is true to some extent, but 
ordinarily, wages do not rise in full proportion to the ad- 
vance of prices generally. The change in wages comes 
lagging slowly after the other changes ; it stops considera- 
bly short of the full expansion in other matters ; and the 
reaction which brings a decline, is apt to affect wages 
sooner than the prices of merchandise. The reason for 
this difference is well stated by Mr. Amasa Walker thus : 

"For nearly all products, there is both an actual and specu- 
lative, or a present and prospective demand ; for labor there is 
only an actual present demand. When business begins to be par- 
ticularly prosperous, there is a general demand for all kinds of 
merchandise, and prices gradually begin to improve. This, at 
once, occasions a speculative demand ; for to buy will be to realize 
an advance ; the larger the purchases, the greater the amount of 
the profit. Every operation pays. The rise continues until every 
article bought and sold as merchandise goes up to the highest 
point. But no one speculates in wages. No one can, if he would, 
buy a hundred thousand dollars worth of labor and hold it for an 
advance, as he can of flour, sugar or tea. On the other hand, 
when the tide turns, the fall of merchandise is broken by the dis- 
position and ability of the owner to hold his goods and, as far as 
possible prevent loss ; but the laborer cannot do this — he must 
sell his services at once for the most they will bring." 

These views are somewhat qualified by the fact that 
speculation, for the time, stimulates production so as to 
increase the demand and raise the wages for labor. This, 
however, is an unnatural stimulus, which leads inevitably 
to over-production. In the day of highest activity and 
apparent prosperity, laborers fail to get their full share of 
the advantage, and when the reaction comes, there is no 



158 DISTRIBUTIOiJ". 

alternative but that many forms of production must be 
curtailed or wholly suspended, and multitudes of laborers 
must be thrown out of employment altogether. Thus, the 
financial revulsion of 1873, which was a necessary conse- 
quence of the speculation and over-production incited by 
the inflated currency of the ten years previous, brought 
its saddest results on the class who depend on wages, cut- 
ting off the means of living with many, and perpetuating 
the distress through a series of years following. 

2. Another cause producing a difference between nomi- 
nal and real wages is found in the Forms of Payment. 
While wages are generally reckoned in money, they are 
not always paid in money. Almost everywhere, unmar- 
ried agricultural laborers have their board counted in as a 
part of their wages. In some countries farm hands are paid 
almost entirely in kind, that is in a portion of the pro- 
ducts, in the rent of a cottage, the use of a patch of ground 
for themselves, the privilege of keeping a cow or a pig and 
certain perquisites such as the hauling of peat or coal. 
With some manufacturing establishments, a store is con- 
nected and a considerable part of the wages of employes is 
paid by orders for goods, whose j)rice and quality may be 
such as materially to reduce the wages when measured by 
necessaries and comforts actually obtained. In our coun- 
try, this " truck-system " is much less common now than 
it was fifty years ago. In France, the artisan classes have 
always resented it, and in Germany, the Industrial Code 
of 1869 forbids this form of payment. It is to be hoped 
the day will soon come when it will be everywhere aban- 
doned. 

3. The gi-eater or less Regularity of employment also 
creates a difference between nominal and real wages. This 
is affected by the nature of the occupation, as in agricul- 



NOMINAL AND REAL WAGES. 159 

ture, brick-making, house-building, the fisheries and the 
like. In a climate like ours, some parts of labor in these 
callings, are precluded at certain seasons and are crowded 
at others. In some Catholic countries, the observance of 
numerous holidays causes considerable irregularity of em- 
ployment. The concentration of labor in large establish- 
ments for production on a large scale, with the methods 
of modern trade, almost inevitably causes alternations of 
periods of great activity with periods of dullness and de- 
pression. In this connection must be noticed also, the 
interruption to regular industry caused by strikes. In 
illustration of these irregularities and of their effect on 
wages, we present the following facts stated by Mr. Bax- 
ter, an English writer. Speaking of the building-trades, 
he says : 

"These trades form a whole and include carpenters, brick- 
layers, masons, plasterers, painters and plumbers, and number in 
England and Wales about three hundred and eighty-seven thou- 
sand men above twenty years of age. It is only the best men, 
working with the best masters, that are always sure of full time. 
These trades work on the hour-system, introduced at the instance 
of the men themselves, but a system' of great precariousness of 
employment. The large masters give regular wages to their good 
workmen, but the smaller masters, especially at the east end of 
London, engage a large proportion of their hands for the job, 
and then at once pay them off. All masters, when work grows 
slack, immediately discharge the inferior hands and the unsteady 
men, — of whom there are but too many among clever workmen,— 
and do not take them on again until work revives. In bad times, 
there are always large numbers out of employment. In prosper- 
ity, much time is lost by keeping ' ' Saint Monday " and by occa- 
sional strikes." 

All this clearly shows that the real remuneration of the 
laborer must be estimated, not by the wages of one day of 
the week or one mouth of the year, but by that rate, as 
qualified by the regularity or irregularity of his employ- 
ment. In reckoning annual earnings, it is common to 



160 DISTRIBUTIOlSr. 

count three hundred working days to the year. For a 
majority of occupations, however, this is probably too high 
an estimate. 

4. In detei'miuing the difference between nominal and 
real wages, regard must also be had to the Duration of the 
power to labor, that is to the number of years during which 
the man can expect to have strengtli and vigor to earn 
wages. Vital statistics indicate that this period varies 
considerably with men of different nationalities, — in differ- 
ent climates, — and in different occupations. To know the 
real compensation of labor, we must estimate the wages of 
a lifetime. Where the conditions of labor involve early 
mortality or disability, as is the case with almost all work 
in mines, the life's earnings are proportionately reduced. 
The rate of nominal wages is generally somewhat higher 
on account of such spiecial exposure, but seldom is the in- 
crease at all commensurate with the risks involved. 

The extensive use of labor-saving machinery introduced 
within the last fifty or sixty years, has no doubt tended to 
depress the nominal wages of labor. But the same cause 
has very greatly multiplied and cheapened the necessai'ies 
and comforts of life ; so that real wages now reach a 
higher measure than formerly. The laborer of to-day 
enjoys a hundred comforts which either were not known a 
half-century ago, or were then quite beyond the reach of 
persons of his class. He may well congratulate himself on 
his improved condition. At the same time, however, the 
fact of his having enjoyed these things so freely, makes 
them seem necessities and aggravates the hardship of 
being, in any degree, deprived of them. 

Nominal and Real Cost of Labor, — In presenting 
the previous distinction, wages were considered from the 



NOMIISrAL AND KEAL COST OF LABOR. 161 

laborer's point of view. The question then was, what are 
the wages at a given rate, worth to him who earns them ? 
We need to look at the same thing also from the em.ployer\^ 
point of view. Now the question is what is the labor per- 
formed worth to him who pays the stipulated wages ? We 
shall see that in this case, as in the other, the rate of 
wages, by itself, is not a certain exponent of real value. 
Mr. Brassey, drawing his conclusions from the actual expe- 
riences of his father in conducting vast industrial opera- 
tions, especially the building of railways in many lands, 
maintains unhesitatingly " that daily wages are no criterion 
of the actual cost of executing works or of carrying out 
manufacturing operations. On the contrary, experience 
teaches that there is a most remarkable tendency to equality 
in the actual cost of work throughout the world." 

The fact is sim] ly that labor, as an element of cost in 
production, must be estimated not by the time occupied, 
nor by the rate of wages paid, but by the efficiency of the 
labor itself. With respect to this element of efficiency, 
men differ very greatly. Mr. Brassey states many facts 
illustrating this difference. We give two or three of them : 

"On one side of a building, a London bricklayer was employed 
at five shillings and sixpence a day, and on the other, two country 
bricklayers at three shillings and sixpence a day. It was found 
by measuring the amount of work performed, without the knowl- 
edge of the men employed, that the one London bricklayer laid, 
without undue exertion, more bricks in a day, than his two less 
skillful country laborers." "On the Grand Trunk Railway (of 
Canada), a number of French Canadian laborers were employed. 
Their wages were three shillings and sixpence a day, while the 
Englishmen received from five to six shillings a day, but it was 
found that the English did the greater amount of work for the 
money." "By a very careful inquiry, at a large iron establish- 
ment in France, it was ascertained that forty-two men were there 
employed to carry out the same amount of work which twenty- 
five men were able to do at the Clarence factory on the Tees." 



162 DISTRIBTJTIOH. 

There are many other like facts that show clearly that 
the different wages paid in different countries for a day's 
labor, are no trustworthy index of the real cost of labor. 
Often it is the best economy to employ men at the highest 
wages, because from superior skill or greater energy, they 
will achieve most for the money. The difference is quite 
generally overlooked, when, in discussing the advantages 
of a protective tariff, a comparison is instituted of the rates 
of wages in different countries. It is often wholly disre- 
garded in the demands which laborers endeavor to enforce 
by strikes. It sometimes happens that, even where there 
is a great demand for labor, many persons are unable to 
obtain employment, because the demand is not for certain 
hours of nominal work, bat for labor that is intelligent, 
trained, efficient. As Mr. F. A. Walker says, "It must 
be held constantly in mind that the value of the laborer^s 
services to the employer is the net result of two elements, one 
■positive, one negative, namely, Work and Wasted' The lat- 
ter term includes breakage, the wear and tear of imple- 
ments and machinery, the destruction or impairment of 
materials, and the cost of supervision and oversight. The 
more delicate the machinery and the more costly the ma- 
terials, the greater is the liability to waste by unskilled 
hands. 

The Various Causes to which these differences in in- 
dustrial efficiency may be referred are grouped by Mr. 
Walker under six heads. In stating them, we adopt his 
terms and follow his order with very brief expansion. 

1. Peculiarities of stock and breeding. Men of differ- 
ent races are found to differ greatly in physical structure, 
in height, weight, muscular strength, nervous force and 
spirit. The development theory of modern scieace, no 
doubt properly, refers this difference to certain physical 
causeSj such as local climate, customary food and habits of 



INDUSTRIAL EFFICIENCY. 163 

life, continued through many generations. Certain social 
and industrial causes are also to be recognized. The 
standard of height in the French army has been reduced 
during the eighty years, since 1793, from five feet four 
inches to five feet one and one-half inches. This is ac- 
counted for by the fact that for more than two generations, 
the strong, healthy, brave men of the nation have been 
drawn off to the wars and used up, leaving the feebler 
males at home to propagate the stock. The employment 
of women and children of tender age at hard labor ■and 
under great exposure, in mines and factories, must after a 
generation or two, depreciate the stock. Peculiar charac- 
teristics thus formed, become hereditary, and are perpet- 
uated in individuals whose circumstances and habits are 
altogether changed. 

2. The Meagreyiess or liberality of Diet. Food is to the 
human frame what fuel is to the steam-engine. " What 
the employer will get out of the workman will depend 
very much on what he first gets into him." The case 
demands only food, in quality nourishing, and in quantity 
sufficient to keep the man in the best working condition. 
Luxuries and abundance beyond this, mar digestion and 
diminish physical power. This matter is carefully studied 
in the treatment of our working animals ; why should it 
not be also regarded with respect to our working men ? In 
this connection, the matter of clothing is an important 
consideration ; for clothing and food help each other in 
maintaining the necessary warmth of the body. A sheet 
iron jacket is put around a steam-boiler to prevent the 
waste of heat ; is it any less a matter of economy that a 
woolen jacket be put about the body of the laborer for the 
same purpose ? 

3. Habits voluntary or involuntary respecting cleanliness 
of person and purity of air and water. Whatever depresses 



1G4 DISTKIBUTIOK. 

this vitality of a man must diminish his efficiency for- labor. 
What can more effectually impair the quality of the blood 
and depress the nervous force than to live as millions of 
laborers do, crowded with their families in narrow, filthy, 
unwholesome tenements, where the bright sunlight is ex- 
cluded and the water they drink is contaminated with, 
sewage matter, and the air they breathe is charged with 
noxious poisons ? Sad and sickening are the reports of 
parliamentary investigations in England on this subject. 
We congratulate ourselves that, in our country, working- 
men, especially those connected with our large manufac- 
tories, are better provided for. Yet the evil referred to is 
growing upon us, particularly as respects laborers of the low- 
est grades in our great cities. Philanthropy and economy 
alike should prompt the use of all proper means to guard 
against this evil. Employers may do something to secure 
decent homes for their workmen as well as to make wages 
just. But as shiftlessness and intemperance are prime 
causes of the degradation of labor, so the chief remedy 
and safeguard must come from laborers themselves culti- 
vating self-respect and will-power for self-restraint. 

4. The general Intelligence of a laborer goes far to 
determine the measure of his efficiency. A man who has 
learned to read and write, has thereby improved his ca- 
pacity to learn a trade or any particular form of work. 
Men intelligent enough to go beyond the mere mechanical 
routine which occupies their day, so as to understand the 
object to be attained and the reason for every step of the 
process, need less superintendence than the dull plodders 
who never think for themselves. Intelligence in the 
laborers may also save much waste of materials. This is 
an important consideration, especially in those branches of 
mechanical industry in which the outlay for materials far 
exceeds the amount paid for wages. Many, through sheer 



INDUSTRIAL EFFICIEN^CT. 165 

ignorance, are utterly incompetent to use delicate and 
intricate machinery, which properly managed greatly 
enhances the profit of production. Intelligent mind^, 
while busy with such machinery, have their invention 
quickened to devise new improvements. All these consid- 
erations clearly show that intelligent workmen employed at 
high wages diminish instead of increasing the real cost of 
labor, measured by the results produced. 

5. TecIiQiical education and industrial environment add 
much to the efficiency of labor. The reference here is in 
part to thorough apprenticeship, but more to the inherited 
instinct and the unconscious tuition acquired by contact 
and familiarity with well organized systems of industry, 
vigorously maintained. ''In some communities, a child is 
brought into the world half an artisan." In association 
with good workmen and their operations, a boy grows into 
habits of accurate observation and of manual dexterity, 
and learns the best part of his trade before he begins his 
regular apprenticeship. Then, he falls naturally into his 
place in the organized routine of daily labor, and quickly 
acquires expertness, despatch and endurance. Every well 
organized and administered manufactory is thus a school, 
an educational institution for training all engaged and all 
who come in contact with it, to habits of subordination, 
regularity and co-operation, the prime elements of effi- 
ciency in labor. 

6. Cheerfulness and Hopefulness in labor, growing out 
of self-respect and social ambition, and the laborer's per- 
sonal interest in the result of his work. For the lack of 
these elements, slave labor is always inefficient and costly 
labor. No pressure of a mastei-'s authority, no driving 
under the lash can bring out such results of labor as come 
from the springs of cheerfulness and hope in the 



166 DISTRIBUTION. 

breast of the worker who respects himself as a free man, 
and whose personal interest in the results of his toil gives 
wide scope to a noble ambition to make the most of him- 
self. The wages of free laborers may be so low as to reduce 
them almost to the level of slaves. But this always involves 
in the long run, a ruinous reduction also of the profits of 
production. It is for the interest of the employer no less 
than for that of the laborer, that wages should be such as 
to promote cheerfulness and inspire hopefulness ; giving 
him who depends on them a chance, by careful thrift and 
determined energy, to better his condition as the years of 
his life run on. 

The Leading Considerations -which determine 
the rate of Wages. — According to our definition, wages 
imply always a contract, a stipulation between two parties 
— a promised rcAvard for promised services. The two par- 
ties come together for their mutual advantage, yet, in 
making the contract, each looks at his separate interest. 
The wages agreed on must have some regard to each of 
these separate interests. Neither will be the absolute and 
all controlling consideration to determine the result. 
Other considerations may have more weight than either or 
both, but each of these will have some weight and claim 
some regard. Looking at the laborer's interest, 

1. The first thing to be considered is the Cost of Liv- 
ing — what is necessary for the support of the laborer, 
according to the standard of his class. , Obviously, the 
individual laborer must have something to live on which 
will keep him in bodily health and vigor, fit for work. 
But this is not all. Man is short-liv^d. The species is 
kept in existence by succession. Children must be reared. 
To keep the number of laborers the same in any country, 
wages must be sufficient to provide food and clothing for 
man and wife and at least two children, until they are 



KECESSART WAGES. 167 

able to support themselves. Something further must be 
added to provide for the laborer in his old age, when he is 
too feeble to work. More than all this is needed, for 
nature has ordained that the human species shall increase 
at a rate more rapid than that of two children to each 
married pair. Hence, in the settlement of wages, regard 
must be had to the rearing of such a number of children 
as ordinarily, in the course of nature make up one family. 
This consideration alone would determine what some 
writers call Necessary Wages. David Eicardo writing in 
1817, propounded the theory, which was for many years 
quite generally accepted, that " the natural price of labor 
depends on the price of the food, necessaries and conve- 
niences required for the support of the laborer, so that with 
a rise in the price of food and necessaries, the price of 
labor will rise ; with a fall in their price, the natural price 
of labor will fall." There is a measure of truth in this 
view. This is a consideration which must affect wages. 
But this is not, as Eicardo's theory represents, the domU 
nant factor in settling the contract. It may be uppermost 
in the mind of the laborer, as he comes to the negotiation. 
He will naturally urge his claim for a compensation which 
will not merely keep him and his family alive, but which 
will enable him to multiply comforts and improve their 
condition. The main force of this consideration is how- 
ever, to define a limit below which wages cannot be set, to 
continue long, without producing misery, a fearful mor- 
tality of children, and a sad waste of the very nerves and 
sinews of effective industry. Nevertheless, that which is 
all in all to the laborer, has little place in the thoughts of 
the employer. Looking now to his interest, 

2. The second thing to le considered is the Value of the 
Products — what returns will be given for the capital which 
engages labor and for the abilities, time and responsibility 



168 DISTSIBUTIOK. 

involved in managing the business. Only the hope of 
such reward draws capital, the fruit of past labor, into union 
with present labor. If that hope is cut off, capital is 
withdrawn, wages cease and the industry is suspended. A 
person who has wealth embarks a portion of that wealth, 
as capital, in some enterprise of production, not because he 
desires to keep it employed, but because he desires to in- 
crease his store by the profits of production. The employ- 
er's ability and his readiness to pay wages depend on the 
measure of these profits. With increased profits he can 
afford to pay more wages. With diminished profits, he is 
prompted to make new stipulations for reduced wages. 
When the business yields no profits, or involves loss, his 
study is how to close the business and extricate his capital 
at the least possible sacrifice. The only exception to this 
course is when the unfavorable result is due to some 
temporary cause, and regard for his honor as respects en- 
gagements already made, and the hope of better times 
prompt him to continue his business even at a loss. It 
stands fixed as a general law, that the employer hires his 
workmen and adjusts their wages with reference to his 
own profit from the products of the business. 

It cannot be said, however, that this alone, any more 
than that previously stated, is the all-controlling consider- 
ation. It is one of prime importance in the view of the 
employer as he enters into the contract. Its chief force is 
to define a limit on the other side, — a limit above which 
wages cannot rise to continue long, without causing capi- 
tal to withdraw and wages to cease altogether on the sus- 
pension of production. The laborer comes to the negotia- 
tion pressing his demand for such wages as he deems 
necessary for Ms support. The employer comes offering 
such wages as he thinks tlie profits of tlie husiness ivill 
enable Mm to pay. The one seeks as large and liberal a 
support as he can get, and so sets his mark for wages as 



THE WAGE-FUKD THEOKY. 169 

higli as possible. The other seeks^as large and mnnificent 
profits as he can secure and so sets his mark for wages 
as low as possible. The actual agreement will strike a 
point between the two, to be definitely determined by con- 
siderations not yet named. These two considerations sim- 
ply determine the minimum limit, below which for the long 
run, wages cannot fall, and the maximum limit above 
which for the long run, wages cannot rise. The minimum 
limit is the rate oiecessary for the support of the laborer and 
his family. The maximum limit is the rate which will 
leave to the employer, out of the profits, a fair return for 
the use of the cajyital and for the care and responsihility of 
management. No lines can be drawn absolutely fixing 
these limits for all cases. They will ever vary with cir- 
cumstances. It will always be an open question with the 
laborer, how little he will try to live on, and with the em- 
ployer, with how little profit he will be content. But like 
certain formulas of mathematics, the statements indicate 
limitations, fixed in the nature of things, within which the 
equation of wages will be found. 

Tlie Wagefund Theory as it is called, demands some 
notice in this connection. This theory is summarily stated 
by Mr. J. S. Mill, as follows : 

"There is supposed to be, at any given instant, a sum of 
wealth which is unconditionally devoted to the payment of wages 
of labor. This sum is not regarded as unalterable, for it is aug- 
mented by saving and increases with the progress of wealth ; but 
it is reasoned upoii as, at any given moment, a predetermined 
amount. More than that amount, it is assumed the wages- 
receiving class cannot possibly divide among them ; that amount 
and no less they cannot but obtain. So that the sum to be di- 
vided being fixed, the wages of each depend solely on the divisor, 
the number of participants." 

As embodying the fundamental principle that capital 
is a prime factor in all productive industry, so that labor- 



170 DISTRIBUTION". 

ers irmst be idle till capital is furnished for them to work 
upon and to work with, and the rate of wages must depend 
on the ratio between the amount of capital and the num- 
ber of laborers seeking employment, thei'e is an element 
of truth in this theory. But as a solution of the problem 
of wages, it is unsatisfactory and misleading. For its basis 
is a purely ideal supposition. As a palpable fact, the sup- 
posed fund has no existence. If there were such a general, 
national fund as the theory defines, it must be an aggre- 
gate made up of smaller funds of the kind possessed by 
the individual employers of the nation. But what employer 
can ever point to a specific portion of his capital which he 
feels that he must expend in wages ? 

That which draws out wealth to be joined, as capital, 
with labor in production, is a Iminful opportu7iity for in- 
creasing wealth lyy the profits of production. In starting 
an enterprise, a certain amount of capital must be provided. 
The bulk of this capital is put into what English people 
call the "plant," that is fixtures, buildings, machinery, 
etc. A portion is also used in the purchase of a first stock 
of materials. For wages, it may be that a small portion of 
the original capital will be reserved, but it is only just 
enough to support the laborers in the outset, till the avails 
of the products come in. More likely what is needed for 
v^ages will be borrowed from the bank, in anticipation of 
coming sales. After the returns begin to appear, they 
are thenceforward depended on, first for the payment of 
wages, then to keep the plant in repair and to replenish 
materials, and finally to reward the capitalist. According 
to the measure of the profits, the work will be extended, 
new laborers will be called in and higher wages will be 
paid. The manager recognizes no such thing as a wages- 
fund, but he does most carefully consider the profit and 
loss item on his balance-sheet. 

At this present writing in 1877, we have seen for two 



CUSTOMAKY RATE OP WAGES. 171 

or three years much capital idle, locked up in factories 
which are closed, and thousands of laborers without work 
and without wages. In other cases, the business is still 
run on reduced time and reduced wages, with no profit. 
At the same time, we have seen the banks overloaded with 
a plethora of money, whose owners are most anxious to 
find some way of putting it into profitable investment. 
This condition of things is explained by the fact that from 
certain causes, which we will not now attempt to name, 
industry failed to yield its customary and expected returns. 
There were no profits, and hence employers could pay no 
wages or could pay but a part of what they had previously 
paid. They could bear, for a time, to lose the remunera- 
tion of the capital invested in the mills, but to add to this 
the steadily exhausting payment of wages would be ruin- 
ous. They dare not borrow and the banks dare not loan 
money to be so used. Now it makes the case no plainer,—^ 
does it not rather confuse matters, to say that somehow the 
financial revulsion curtailed the loages-fundf Is it not 
more philosophical and more in accord with common sense 
to say that wages fail or decline because industry fails to 
yield the necessary profit? This is the plain matter of 
fact. Ideal funds, ideal divisor and dividends, ideal aver- 
ages cannot clear up the problem. "What has been, must 
be, whenever, for whatever reason, values produced fail to 
show a sufficient surplus above the values consumed. 

3. What has been the Customary rate of Wages is a 
consideration of some force in determining the rate that 
shall be. This means no more than that there is always a 
presumption in favor of existing usnge, wliich on one side 
or the other may be more or less effectually pleaded in the 
negotiation between the parties. Tliis consideration 
always resists a contemplated change, and when necessity 
compels a change to be made, it essentially modifies the 



172 DISTEIBUTIOIsr. 

degree and the time of that change. Thus when in 1865, 
an inflation of the currency in the United States had 
raised prices and increased the cost of living, and had at 
the same time stimulated production and increased the 
value of its returns, both necessity on the one hand, and 
ability on the other called for an advance of wages. But 
employers clung tenaciously to the customary rates and 
yielded very slowly and reluctantly to the call, and after 
all, stopped short of advancing wages in full proportion to 
the enhanced prices and profits. Ten years later, we find 
a condition of things just the opposite. Both profits and 
the cost of living were greatly reduced, and employers 
were constrained to reduce wages accordingly. But thea 
the laborers clung to existing rates and resisted the reduc- 
tion, in many cases with violence. This tendency al,ways 
appears qualifying the eSect of other considerations. It 
is like the law of inertia in physics. It resists or impedes 
all changes of wages, and though an incidental, and com- 
paratively unimportant consideration, it needs to be recog- 
nized and regarded. 

4. Competition is heyotid all others the controlling con- 
sideration in determining wages. AVe cannot say of this 
that it is absolutely controlling. For the considerations 
previously named must be to some extent respected. But 
we do recognize competition as more influential than any 
or all of these. It cannot nullify, but it does, in a meas- 
ure, overbear them. 

Com23etition is the endeavor of two or more persons to 
gain the same thing, at the same time. In this matter of 
wages, it appears in either or both of the parties to the 
contract. Many laborers are seeking wages and good 
wages at the same time. Many employers are seeking 
profits and large profits at the same time. Competition 
becomes active just in proportion to the comparative num- 



COMPETITION, l^S 

bers on either side. If the number of laborers is just 
sufficient to do the work desired by the employers, on 
terms satisfactory to both parties, there will be no compe- 
tition on either side ; but that balance is seldom realized, 
and never stable. Whenever it is disturbed, competition 
sets in. If the number of laborers is large in proportion 
to the employment offered, the competition is active among 
the laborers. Each rather than lose his chance for wages, 
will lower the price demanded for his labor. If the num- 
ber of employers and the amount of capital they command, 
is large in proportion to the number of laborers, the com- 
petition is active among employers. Each rather than lose 
his chance for anticipated profits, will raise the price 
offered for the labor he wants. Thus, as Mr. F. A. 
Walker states the case, " Each laborer will sell his labor 
at the highest price which any employer can afford to give, 
since the employers are in competition among themselves 
for labor. Each employer will get his labor at the lowest 
price at which any laborer can afford to sell it, since the 
laborers are in competition among themselves for employ- 
ment. The loioest price at which any laborer will sell his 
labor, is thus the highest price which any employer can 
afford to pay." 

If for any reason, the wages in a particular branch of 
industry rise above the ordinary rate, a speedy rush of 
laborers into that employment intensifies competition till 
the wages are brought down. If, on the other hand, a par- 
ticular form of production yields profits above the ordinary 
rate, there comes a rush of employers with their capital 
into that branch of industry and in their competition with 
each other, wages are raised, products are multiplied and 
cheapened till the profits are brought down to the ordinary 
level. The principle of comi^etition tends to adjust to 
each other the natural increase of population on the one 
side, and the natural increase of capital on the other, so 



174 DISTRIBUTION 

as to keep the ratio uniform and hold wages steadily in an 
equilibrium most favorable to the interests of all. The 
tendency is manifest, though a perfect result is hindered 
by the inherent difficulty of transferring laborers from one 
place or occupation to another, as compared with the 
facility with which capital and commodities are trans- 
ferred. 

If competition were universally /ree and fair, no doubt 
present inequalities of condition would be removed, and 
the burden and the benefits of human industry would be 
equally distributed. Conflicting interests would be har- 
monized by it, so as certainly to secure the greatest good 
of the greatest number. It would adjust the customary 
rate of .wages at that golden mean which would ensure a 
comfortable support to laborers and adequate profits to 
employers. Something like this is the theoretical ideal of 
Political Economy toward which its principles tend. As 
the science is more fully unfolded and more freely applied 
to all industries, and all classes, competition does become 
more free and fair, and more efficient, as the grand regu- 
lator of production, distribution and exchange. But to 
study the practical problems of human industry, especially 
this problem of wages, on the assumption that this ideal 
is or can be made actual, is as absurd as it would be, in 
practical mechanics, to take as actual facts, the mathe- 
matical ideals of points and lines and forces and motions, 
and proceed to plan an engine without regard to the gross- 
ness of matter, or the resistance of the atmosphere, of 
friction and of gravitation. As the world goes, self-inter- 
est pushed to the extreme of over-reaching selfishness, is 
continually interfering with competition to make it 
neither free nor fair. Thus, in the actual working of 
competition, falsehood, trickery and fraud are introduced 
in manifold and subtle forms. In the intense struggle of 
conflicting interests also, high-handed measures are adopted 



STEIKES AND TEADES-UKIONS. 175 

to restrict or rule out competition, because in its nor- 
mal working, it hinders selfish greed from attaining 
its ends. 

Hence, the ConiMnaiions to resist competition, which 
are entered into on either side, demand some notice in this 
connection. Combinations of laborers with respect to 
wages take two forms, which though often blended, may 
be best presented separately. They are Strikes and 
Trades-unions. 

A Strike is a mutual agreement of a number of work- 
men to demand of their employers certain terms, and to 
stop work till the demand is granted. The right of a 
laborer to define the terms of the contract with his em- 
ployer so as to secure his own interest cannot be questioned. 
That involves also tlie right to refuse to labor except on 
those terms. Neither can the right of numbers, having 
common interests, to combine in counsel and effort to pre- 
sent and maintain their claim be questioned, so long as 
they do not interfere with the freedom of others. When, 
however, the striking party uses force either to compel 
others to join the combination or to prevent their working 
except on the terms which they dictate, there is a mon- 
strous violation of a most sacred right, — a right which 
should be ever dearest of all, to the laborer, — the right to 
do what he luill with himself, his time, his strength, his 
skill. Yet to be effective, the strike must suppress all 
competition. That is its chief aim. It must bring all 
competent to perform the labor in question into the com- 
bination, or prevent those outside from coming in to fill 
the places vacated by the strikers. Hence strikes almost 
inevitably lead to a violent outrage upon the most precious 
right of freemen. Turgot, the great financial minister of 
the French King Louis XVL, said, a hundred years ago, 
" God in giving toman wants, has made the right to labor 



176 DISTRIBUTION". 

the property of all men, and this property is the first, the 
most sacred and the most imprescriptible of all." 

Apart from this great wrong, a strike may do some 
good service as a strong and determined assertion of a rea- 
sonable claim. The claim is reasonable only when the 
necessities of the laborers require and the actual profit of 
the industry permits the increase of wages, or whatever of 
better terms is insisted on. In such a case, the measure 
may prove successful and yield an advantage sufBcient to 
compensate for the temporary serious sacrifice involved. 
If, however, the terms demanded will so reduce or endan- 
ger the profits as to leave no inducement for the em- 
ployer to devote his energies and capital to the business, 
the effect of the strike can be only disastrous to all parties. 
It is evident, therefore, that strikes cannot absolutely con- 
trol wages. There is a chance that in occasional instan- 
ces, they may yield a real benefit. But the probabilities 
are, as illustrated by many facts, that they will be attended 
with grievous wrong and in the end, aggravate, rather 
than relieve the evils which prompt them. Mr. Brassey 
says, "Strikes against a falling market ahoays fail." 

Trades-unions are cornbinations of laborer's of particu- 
lar trades, in permaiient organizations, to iwomote the gen- 
eral interests of their respective fraternities. These organi- 
zations bad their prototype in the "guilds" of the middle 
ages. Then the condition of society was such that no 
rights were sacred or safe except as they were defended by 
the strong arm of might, and all privileges were held 
under a law of restriction and isolation. Each guild stood 
for itself against other guilds and against the community 
generally. Trades-unions of to-day appear in a better 
character. They aim at a variety of objects for the mutual 
benefit of the members, such as contributions for the relief 
of the sick, disabled and distressed, and measures to pro- 
mote sympathy, social enjoyment and some mental culture. 



TRADES-UKIOlfS. I'?? 

In tliis aspect, they render beneficial service, and are wor- 
thy of praise and encouragement. 

But often, they attempt also, to use their power of as- 
sociation with some accumulated money-power, to regu- 
late the rate of wages against the normal action of free 
competition. They do this in two ways, by promoting and 
sustaming strikes and by restricting apprenticeship. A 
strike under the direction of a trades-union, is likely to be 
better organized than an independent strike, more wide 
sweeping, more persistent, and in its first stages more re- 
strained from violence. But according to actual experience 
thus far, it is liable to insist on unreasonable demands, 
and in the extreme issue, it becomes uncontrollable and 
runs into wild and disastrous excesses. In such move- 
ments too, the union almost necessarily aims to establish 
uniformity of tvages, irrespective of the varying abilities 
and efficiency of different workmen, which is an injustice 
to the superior artisans as well as to employers. 

The attempt arbitrarily to limit the number of appren- 
tices to any trade, is directly opposed to free competition 
and aims simply at establishing m.onopoUes. It involves 
therefore, the injustice and mischief which are inherent in 
the very principle of monopoly. It is ever a forced exac- 
tion on the whole community for the benefit of a few. If 
the measure could be carried out universally, it would 
simply make every trade a monopoly and set the various 
branches of business in antagonism Avith each other, so as 
seriously to obstruct all industry. Mr. Brassey, speaking 
of this part of the policy of trades-unions says, " Their 
influence has too often been essentially illiberal, anti- 
social and calculated to establish among the industrial 
classes of the country, that subdivision of Caste which has 
been the great curse of India." Hence, we may add, this 
policy is in its very nature self-destructive and impractica- 
ble. The most that can be attained is a partial and tern- 



178 DISTEIBUTIOI^. 

porary advantage, to be more than counterbalanced in the 
reaction which is sure to come. 

It is further to be observed that the maintenance of 
these trades-unions involves a heavy tax on the members. 
The funds thus raised and the affairs of the union are put 
into the hands of leaders who gain their official positions 
mainly by reckless declamation against the rapacity of em- 
ployers and by loud professions of sympathy with the 
wrongs of the laborers. These leaders are apt to exercise 
their power with despotic authority, and are held to 
slight responsibility for the disposal of funds. They have 
thus a personal interest in retaining or exercising their 
offices, which may be quite at variance with the real inter- 
ests of the body of workmen. When an issue is fairly 
joined, public interests are apt to be recklessly sacrificed, 
until public opinion which naturally inclines to favor the 
wage- receiving class, is turned against them, and the power 
of the government is called to interpose. Then the move- 
ment breaks down, having effected only loss and damage 
to both parties, — a damage most severely felt by the labor- 
ers, the party least able to bear it. All tins was clearly 
illustrated in the disastrous action of the railroad brake- 
men and firemen in 1877. 

If the prominent object of trades- unions were, instead 
of directly resisting competition, to Tceep competition free 
and fair ; and if, in the furtherance of this object, the as- 
sociation would carefully study the essential conditions of 
the wages-problem, and inform themselves concerning the 
actual state of their respective trades, with the means of 
improvement for the benefit of all, employers as well as 
employes, they might be made to secure valuable purposes. 
Then, the advantages of association and the power of com- 
bination would conduce to the real and abiding prosperity 
of all productive industry. 



COMBINATIOifS OF EMPLOYERS. 179 

On the other side, Combinatiotis of Employers are often 
formed with a similar aim, that is, to resist the natural 
working of competition, for a supposed advantage of their 
own. Such combinations sometimes aim to regulate the 
exchange of products by an agreement of those engaged 
in a particular trade not to sell below a certain price. 
This simply creates a form of monopoly in the general 
market of commodities, and belongs to the department of 
exchange. We have now to consider these combinations 
only as they attempt to regulate the rate of wages by agree- 
ments not to pay above a certain rate. It must be ad- 
mitted that every man who possesses wealth has the right 
to do what he will with his own. He has the right to say 
what portion of it, if any, shall be employed as capital in 
production. And as an employer of labor, he has the 
right to say what wages he is willing to pay for certain 
services. A number of employers have also the right to 
unite for counsel and action with respect to their common 
interests, and the matter of wages may properly be con- 
sidered in such associations, provided they lay no constraint 
upon the freedom of other people to exercise similar 
rights. The question before us is one, not of abstract 
right but of luhat is feasible and wise. Can such combi- 
nations arbitrarily determine rates of wages ? Is it wise for 
them to attempt such control ? 

It is obvious that,, to be effective, the combination 
must embrace all who are engaged in the particular indus- 
try. This is not an easy thing to accomplish. Any who 
remain outside the combination may overbid for labor, and 
so open the door for renewed competition. Much more 
difficult is it, nay, impossible to hold all the capital of a 
country bound by the rules of the combination. If the 
wages agreed on are such as to insure a margin of profits 
above those of business generally, free capital will rush in 
to engage in the industry, and make its own terms for 



180 DISTRIBUTION". 

labor, just as certainly as air will rush in to fill a racuum, 
or as Avater will flow to restore its equilibrium, disturbed. 
These considerations jDreclude the success of such attempts 
to dictate wages, except for temporary emergencies, as 
when laborers are thrown out of other employments and 
can be easily substituted for those who refuse to work for 
the wages offered, or when for some reason the actual em- 
ployes are unable to change their situation. 

The attempt to control wages by the arbitrary dictum of 
such combinations against the normal working of competi- 
tion is unwise, even if it could be successful, because, more 
than anything else, it produces the impression that capital 
is tyrannizing over labor. This causes suspicion and discon- 
tent, and incites antagonism and combinations on the other 
side. Thus, the cheerful cooperation of labor and capital 
essential to prosperous industry is effectually prevented. 

The true function of such associations is to secure a 
better understanding of the laws of production and of the 
actual condition of particular branches of trade and of the 
causes, manifest and hidden, which vary the proceeds of 
industry. Associations of employers generally embody 
more intelligence than those of laborers. More of reason- 
able discussion and of broad, fair-minded conclusions may 
therefore be expected of them. 

Our conclusion is then that combinations on either 
side, so far as they attempt to resist or prevent free com- 
petition, cannot, in the long riui, materially influence the 
rates of wages. If, however, representatives from both 
sides could often and freely meet for mutual explanations, 
candid discussions and the communication of information 
concerning the labor-market and the market for products, 
many evils that spring from vicious, fraudulent and per- 
verted competition might be averted and both wages and 
profits would be more permanently settled on the basis of 
even and stable justice to all. 



THE GENEEAL LAW OF WAGES. 181 

5. The Golden Rule of Christ, " Whatsoever ye ivoiild 
fhat men shoidd do to you, do ye even so to them," presents 
another consideration of some weight in determining 
wages, which Political Economy as well as Christian 
Ethics may fitly recognize and enforce. This rule embod- 
ies a principle which tends to harmonize the action of self- 
interest among men, in all relations. Genuine self-interest 
as distinct from rank selfishness, culminates in the adop- 
tion of this rule. There are pleasing indications that it is, 
in increasing measure, regarded in the relations before us. 
In many large establishments like that of Mr. Bright in 
England, and some large factories in our country, it is 
made evident that even corporations can have souls, and 
that employes may perform their labor with heartiness 
and good-will, for the advantage of employers, no less than 
for their own. We cherish the fond hope that this rule 
of wisdom and true policy is destined steadily to gain a 
wider ascendency, softening animosities, inspiring mutual 
confidence and effecting genial cooperation, so as to bring 
out the full power of productive industry in results, larger 
and more equably distributed than the world has ever yet 
known. 

The general law of wages may be concisely stated thus : 
By free Competition, loages are adjusted to the ratio 
between the amount of Capital seeking labor and the Clum- 
ber of Laborers seeking employment ; competition itself 
being modified by some regard to the cost of living, the pro- 
ductiveness of industry, established custom, and the pro7npt- 
ings of good-will between man and ma7i. 



CHAPTER XIV. 

.CAUSES PEODXJCING VAEIATIONS IN" THE 
EEMUKEEATION OF LABOE. 

Special Circumstances by -which Wages are 
affected. — While the general law stands as just stated, 
it is fonnd that the rates of wages differ considerably in 
different employments. These variations spring mainly 
from causes which vary the intensity of competition iu cer- 
tain cases. They deserve however a brief, distinct notice. 

Wages are affected hy the ease or difficulty, the pleasant- 
ness or unpleasantness, of the employment. When the em- 
ployment for instance requires great muscular effort, the 
number of persons who can accomplish it, is comparatively 
small. This diminishes the supply, and of course increases 
the price. When this is the case, as men are not usually 
attracted by the prospect of hard labor, a smaller number 
apply for this kind of employment. This still further di- 
minishes the supply. Hence, the price will rise, as the 
wages must be increased sufficiently" to overcome this repug- 
nance. On the contrary, when the labor is easy, the number 
of persons both able and willing to perform it, is increased ; 
thus, the supply is large, and wages fall in proportion. 

The same effect is produced by the general estimation 
of the pleasantness or unpleasantness of the employment. 
Any kind of industry which, from necessity, is uncleanly, 
commands higher wages than one which can be performed 
without interfering with personal neatness. One which 
is considered disgraceful, can be supplied with laborers. 



CAUSES AFFECTIlfG WAGES. 183 

only by paying an unusual price. The business of a pub- 
lic executioner, though not difficult, is disagreeable, and 
generally considered disgraceful ; and hence, in countries 
where it is made a distinct profession, it commands liigli 
wages. 

Wages are affected by the ^ill required in -performing 
the operation. This arises from two circumstances : First, 
skill can be acquired only by practice and education. 
This is in itself costly, and is an investment, for which 
the possessor justly receives a compensation. And Second, 
unusual skill generally supposes some unusual endow- 
ment. But in proportion to the rarity of the endowment 
must be the smallness of the supply, and of course, the 
rise of price which must be paid for the product. 

Wages are aff'ected hy the Confidence reposed. Wherever 
a great amount of capital is employed, it must, to a very 
considerable degree, be placed in the power of some one 
or more agents. Hence, if this power be abused, or used 
unwisely, the whole is liable to be lost. If the manager be 
careless, he may destroy it by negligence ; and if he be dis- 
honest, he may convert it to his own emolument. Now, 
this union of judgment with incorruptible integrity, is ab- 
solutely necessary in many of the operations of production. 
But such a union is rarely to be found. Hence, while the 
demand is imperative, the supply is small. On this 
■account, though the wages of such pei'sons ai'e high, it is 
generally found more economical to employ them at any 
price, than to intrust important affairs to the incompetent 
and the vicious. This is one of the rewards which, in the 
course of human events, God bestows upon wisdom and 
virtue. 

Wages are affected hy certainty or uncertainty, con- 
stancy or inconstancy of employment. Division of labor 
requires that a man devote himself exclusively to a single 
employment, and therefore that his whole emolument be 



184 DISTEIBUTI02!f. 

derived from that employment. Hence, when the oppor- 
tunities of employment are rare, the wages for each par- 
ticular operation must be greatex*, since we must pay, not 
only for the time actually employed, but also for that time 
which is lost to the laborer, while waiting for employment. 
We pay more money for rising a mile in a hackney-coach 
than for riding the same distance in a stage-coach, because 
the hackney-coachman may stand half a day in waiting, 
before he finds another customer. Thus also, when a trade 
can be exercised for only a part of the year, as in the case 
of a bricklayer, you pay to the laborer higher wages, be- 
cause he must receive enough to compensate him for the 
time in which he is obliged to be idle. The crews of whal- 
ing vessels are paid partly in shares of the oil taken. Their 
pay for a successful voyage must therefore exceed ordinary 
seamen's wages to balance the occasional loss when the ship 
comes home " clean" or without any oil. 

Another circumstance loliicli affects the price of wages, 
is the certainty or uncertainty of success. In the ordinary 
avocations of lite, if a man acquire the requisite skill, he 
will almost invariably find employment. In the profes- 
sions it is not so. Those who have prepared themselves at 
great expense for the practice of a profession, unable to 
find employment, sometimes relinquish it for another pur- 
suit. When such a risk exists, the wages of labor should 
be greater, for the laborer is entitled to a remuneration for 
the risk of this loss of time and of capital. 

These are presented by Adam Smith, as the principal 
circumstances on which, irrespectively of the influence of 
capital, the price of labor depends. It will be at once 
seen that they are susceptible of very great variety of modi- 
fication and combination, and that frequently, several of 
them must be taken into the account, in order to explain 
the reason of the high or low price of any particular form 
of labor. 



SALAEIES, COMMISSIONS AND FEES. 185 

The Remuneration of labor by Salaries, Com- 
missions and Fees, while goTerned to some extent by 
the principles of wages, involves also some peculiarities 
which must be mentioned. Generally the labor which is 
thus compensated is of a kind that requires both supei'ior 
natural gifts and special and expensive education. It is 
also true of it that, on the one side, personal character and 
reputation, and on the other, the respectability, dignity 
and permanence of the service are estimated as of much 
consequence. These considerations more or less i*ule out 
ordinary competition, and put the mutual contract, in 
each case, on special grounds. 

The whole number included in the classes whose labor is 
thus comi)ensated, is small compared with the great body 
of those who receive wages. Yet to the few so favored, a 
large share of the proceeds of industry is actually dis- 
tributed. At first view, this looks like a grievous injus- 
tice. But it must be remembered that all private interests 
are promoted when public affairs are guided by ??^e?^ of 
ability and integrity, and that a wise and vigorous executive 
administration is all essential to make any business profit- 
able. Wages must come ultimately out of the proceeds 
of the labor done, and the amount of these proceeds 
depends much on active invention and efficient manage- 
ment. Hence it is for the advantage of every ordinary 
laborer that the places of special trust above him be filled 
by men of capacity well trained. Such men are compara- 
tively few. They are wanted everywhere, and therefore 
they can, to a great extent, make their own terms of service. 
At the same time, it is good economy, as we have seen in 
a previous chapter, to pay the price necessary to secure 
such service. ' 

In mechanical industry, the qualifications which set 
one and another above the wage-receiving class, are of- 
ten brought out in self-made men so called — men who 



186 " DISTRIBUTIONS". 

begin in the lowest rank of laborers, and reveal their rare 
endowments under a process of self-development, as oppor- 
tunity is offered. Thus George Stephenson began his in- 
dustrial career as an engine-boy at the lowest wages. 
Slowly and steadily, as his natural aptness found oppor- 
tunity to exercise itself, he rose in grade as a workman, 
until at the age of thirty, he was made an engine-wright 
at Killingworth colliery, at a salary of one hundred pounds 
a year, when he declared that his fortune was made. And 
so it was, but in another sense than he di'eamed. For 
that position brought him into connection with the 
first efforts made to construct a locomotive-engine, and 
soon his latent, genins flashed out in those splendid 
achievements which gained for him the title of " the father 
of raihvays." For the services of his later years, he re- 
ceived munificent remuneration. But that seems of little 
account compared with the benefit conferred on all depart- 
ments of industry and on the civilized world by the fruits 
of his inventive genius and trained judgment. One such 
eminent example quickens and encourages the activities of 
thousands who raise themselves from the ranks to various 
positions of responsibility, for the advantage of all, no less 
than for their own emolument. 

In other cases, 7o7ig years of careful study with the best 
facilities for education, give to the man a special prepara- 
tion for the special service of his life. So it was with 
Eobert Stephenson, the son of George. His father, well 
appreciating the value of advantages he had never enjoyed, 
spared no expense to add to the son's inherited genius for 
mechanics, the culture and discipline of an excellent edu- 
cation. Enabled thus to start in a position where he com- 
manded a high salary, he pressed his way rapidly on to the 
highest eminence, as a constructor of some of the most 
stupendous iron bridges in the world, to a seat in the Brit- 
ish parliament also, and to places of honor in scientific 



SALAKIES, COMMISSIONS AND FEES. 187 

associations. He distanced all competitors and was paid a 
rich reward for his labors, but these labors enriched the 
world in a far higher degree. 

In the learned professions, especially those of law and 
medicine, a man of marhed ahility, trained ly thorough 
education, enriched ly varied experience, and having at 
command the treasures of learning, receives for his services 
extraordinary remuneration. When personal liberty and 
security, or great amounts of property are at stake, all men 
reason that it is sound economy to employ the best legal 
talent, at any price. Such men as Webster, Choate and 
Evarts have retaining fees thrust upon them, more than 
they desire, and for their own relief are almost forced to 
sift out the business offered, by high charges. So too, 
when health and life are endangered by disease, all are 
moved to seek the best medical counsel. Such physicians 
as Nelaton, Mott and Parker would be overrun with calls 
if they did not set their fees so high as to rule out many. 
In these cases, acquired reputation comes in always to en- 
hance the remuneration asked and freely given. That 
reputation has been gained a-t the cost of years of careful, 
faithful, successful practice, and has a corresponding value. 
It may be that, for a much smaller compensation, the 
young, talented, well-read lawyer would manage a case as 
well or better than the old practitioner of note ; but you 
have no assurance of this, while the other's reputation 
does give a certain promise of effective service. 

Most marked of all is this difference of remuneration 
in the departments of Fine Art ; for it is here that genius 
brings forth its most brilliant productions, which seem in 
some cases, almost supernatural. A few lines from the 
pen of a Bryant or a Longfellow, a few strains from a 
Jenny Lind or a Kellogg, a painting done by a Church or 
a Bierstadt, a statue wrought by the chisel of a Thorwaid- 
sen or a Powers, command prices that seem to common 



188 DISTEIBUTION. 

folk absurdly extravagant. But these products bear each, 
some charms, the strokes of genius, which only the gifted 
few can render, — which are inimitable. Those endowed 
with the capacity for such work are set above the reach of 
competition, in the enjoyment of an unrestricted monopoly, 

Aiithors of hoohs are generally compensated by a com- 
mission or percentage of the price of each book sold. 
Often, the actual remuneration received has but little 
respect to either the genius, the learning or the labor of 
the author. The pojndar taste or tvant, and the manner 
in which the production meets a present condition of the 
public mind, are often of more account than all other 
considerations. Thus the richest returns are commonly 
won by publications which are ephemeral and trifling. In 
many cases such success seems a matter of mere chance, 
and one successful hit gives no certain assurance of a sec- 
ond like result. 

To account for the high scale of remuneration awarded 
to the kind of service we have been considering, it is often 
said that the expense of time and money involved hi ohtain- 
ing the requisite education, must he compensated by adding 
to common wages enough at least, to pay ordinary interest 
on the original outlay, — also that success in these profes- 
sions is uncertain, and the remuneration must therefore 
cover the greater risk, so far at least, as to balance the 
reward of eminent success, against the loss of many by 
utter failures. These considerations do indeed Justify the 
extraordinary compensation on grounds of equity. But 
in the actual contract between parties, they are seldom, if 
ever regarded. The estimated importance of the service 
or the special desirableness of the product on the one side, 
and the diminished force or entire absence of competition 
on the other, prevail to settle the compact. 

Custom or some general agreement, formal or informal, 
fixes rates of remuneration for various grades of service 



PKOFESSIONAL FEES. 189 

below those of singular eminence. Thus for book-keepers, 
cashiers, foremen, superintendents of departments, travel- 
ing agents, etc., there is recognized an ordinary rate of 
salaries or commissions, Avith room for some variation out 
of regard to comparative ability and trustworthiness. In 
the legal and. medical professions, the fees are fixed by a 
. general agreement or understanding, at a scale which is sus- 
tained by the "esprit diL corps.''' Where public interests 
are involved, legislation is sometimes called to define the 
fees that may be collected by legal process. Personal con- 
siderations also have some weight. A man's relationship 
to the leading manager of a business, sometimes secures 
for him special remuneration. Another's long continued, 
faithful service is justly regarded as having earned for him 
a right to his position and compensation, against the com- 
petition of new and untried men. 

In connection with great stock-corporations, an abuse 
sometimes appears, when the salaried managers, having 
contrived to controla large majority of the stock, appoint 
themselves and fix their compensation, at their own will. 
This must be set down as a purely arbitrary exercise of 
power, unrestrained by right or reason. Very often, it 
involves direct fraud on other stockholders, and leads to 
ruinous mismanagement. Sound economy and moral in- 
tegrity join to reprobate such action. 

The honor, dignity and permanence of certain positions 
demanding a high order of talent, are considerations which 
often make men willing to accept a less remuneration than 
their services elsewhere might command. Thus a lawyer 
of eminence whose annual income from practice at the 
bar would be twenty-five thousand dollars, may accept a 
place for life on the bench of the United States Supreme 
Court at a salary of only ten thousand dollars. These 
considerations are of much account in the remuneration 
of clergymen and teachers. Men in those professions are 



190 DISTRIBUTIOIS". 

confessedly underpaid, when compared with men of equal 
ability and attainments in other occupations. But their 
offices secure to them social standing and respectability, 
and their duties are congenial to cultivated minds. But 
above all these, especially with clergymen true to their 
high calling, there is a spirit of devotio7i to the ivorh of 
Christian beneficence for the well-being of mankind, which 
finds a satisfaction and joy in the service itself ; and thus 
goes far to balance in their estimation, the meagreness of 
their pecuniary reward. 

The Remuneration for Women's Labor in most 
employments, is less than that of men for similar services. 
The fact of this difference is apparent on every hand, and 
the exceptions are few. Is it right or reasonable that it 
should be so ? The answer to this question can be reached 
only as the reasons which account for the fact are fairly 
weighed. We attempt therefore a concise presentation of 
these reasons. 

a. It is a prevalent opinion that for miscellaneous labor, 
women are by physical and mental constitution inferior to 
men in the qualities essential to highest 'efficiency. This 
may be a mistaken opinion, based upon prejudice and 
confirmed by long usage. Yet so long as it prevails, it 
will determine practice. We step into a cotton factory, 
and in the spinning-room we see men employed 
almost entirely, because women have not the strength 
needed to handle the jennies. In the weaving-room we 
find two or three men working with a hundred women. 
The work is light for all. The women attend the looms as 
well or better than the men, but it would not be safe to 
leave the room wholly to their charge, because there come 
exigencies when some qualities are needed which the woman 
has not and the man has. This is especially true with 
respect to the oversight of numbers. For general superin- 



women's wages. 191 

tendeiice, some masctdme qualities are supposed to be 
essential. Just so it is in a large public school. For the 
greater part of the details of iastruction, female teachers do 
as well or better than those of the other sex, but it is the 
general belief that to work well, the school must have a 
man at its head. Mothers themselves are distrustful of 
any large school which has not a man near enough for 
timely interposition to meet emergencies. To change this 
general opinion will require something more than an occa- 
sional instance of a woman possessing what must still be 
termed masculine force and executive ahility. 

h. In the order of nature and in the constitution of society, 
the sphere of activity for most ivomen seems ordained to he 
in the Home, each the solace and help of a husband, by 
whom she is supported and protected, and the nourisher 
and mentor of the children. This is prescribed by nature 
as the first, simplest and most universal application of di- 
vision of labor.. The numbers of the two sexes are almost 
precisely equal the world over. As a rule, it is not good 
for man or woman to be alone. Where marriage is dis-^ 
couraged, there is something radically defective in the 
structure or vicious in the habits of society. All this 
bears on the question before us, since it tends to rule out 
women from many common occupations of productive in- 
dustry, and to create the impression that it is umuomanly 
to enter them. This impression may run to the extreme 
of a false delicacy, and so unduly limit the occupations in 
which women who are thrown upon their own support are 
willing to engage. But nevertheless, there is, in the very 
nature of things, some check on their freedom, from this 
cause. 

c. The wages of men are adjusted to the presumption 
that each has or loill have a fam,ily to provide for, and those 
of looynen to an anticipation that each will in due time, hy 
marriage, he relieved of her own support. A very large 



193 DISTKIBUTIO]<r. 

propoi'tiou of the women who to-day, depend on their 
own labor, are young persons who are passing, one after 
another, into new relations, where they are to be cared for 
by men's earnings. We recognize the hardship which this 
order of things brings on some women who, in the vicissi- 
tudes of life, are compelled by their own labor to support 
not only themselves but their children, and it m.ay be sick 
or intemperate and thriftless husbands. But the number 
of these is comparatively small. The laws of our science, 
like the laws of material nature, are adjusted, on general 
principles, to general conditions. Some incidental, occa- 
sional distress is produced by their inflexibility, and yet 
that very feature of the laws may be necessary to secure 
the greatest good of the greatest number. 

d. The actual organization of productive industry, in 
all departments which give ^Jlace to both sexes, is established 
on this basis of less compensation for too men's work. , In 
most cases, the greater cheapness of female labor is the 
chief reason for employing it. The cost of production is 
diminished thereby. The prices of all commodities into 
which this kind of labor enters are determined accord- 
ingly. The universal competitions of trade with their 
manifold complications are threaded through and through 
with this element of women''s cheap labor. The whole 
body of consumers are accustomed to enjoy a benefit from 
it. Hence the principle cannot be easily eliminated. If 
the rule is a false one, it cannot be suddenly changed 
without deranging the entire systems of production and 
exchange. If the prices of men's labor be reduced to the 
level of women's wages, widespread and aggravated distress 
among all the laboring classes must follow. If the change 
be on the other side, the prices of goods included among 
the necessaries of life, must be raised proportionally, pro- 
ducing general distress in another way. All this indicates 
that the established order of things presents such obstruc- 



women's wages. 193 

tions, that any change must be gradual, and that there 
are great general interests to be regarded in every step of 
the movemeat. 

e. There are feminine instincts which prompt women to 
draw hach from many occupations hecause they are coarse, 
or involve too rough jostling witli the loorld. These in- 
stincts need carefully to be preserved, for the charm of 
womanhood is gone when they are crushed out! The pre- 
vailing tendency is to make them excessive so that they 
grow into the sentiments of false delicacy before alluded 
to. Hence few occupations are open to women, and these 
are so crowded that competition is intense and low wages 
are inevitable. It is no more in the power of employers to 
resist this pressure than it would be in the power of a man 
with his bare arm to stem the Mississippi's current. All 
the considerations before named, concentrate here, and 
here, whatever means are employed to relieve the evil or 
the wrong, must find their application. False ideas of 
respectability keep thousands of women in lone garrets, 
plying their needles for a reward which barely saves them 
from starvation, while there is a steady demand for em- 
ployment in domestic service, where, well fed, in comforta- 
ble homes, they might earn wages which would enable 
them steadily to lay up a little surplus. 

/. This sharp competition is greatly intensified hy the 
fact that many xcomen icho seek employment are pai'tly or 
wholly supported hy other resources than their oion' labor. 
Some, under the pressure of necessity, simply to escape 
the ennui of idleness, or to make their lives useful, and 
very many, aiming only to secure some addition to a par- 
tial income from other soui'ces, seek a share in the limited 
occupations open to females. These are willing, because 
tliey can afford to work for less compensation than is 
needed by those who have nothing but their labor to de- 
jiend on. And often the fact of their better circumstances, 
9 



194 DISTEIBUTIOJS". 

their better appearance and it may be their superior intel- 
ligence secures for them the preference. Of necessity, 
therefore, excessive competition crowds the other class 
more closely to the wall. Certainly it is desirable to 
encourage in young women a spirit of independence, and 
an acquaintance with and a love for useful occupation. 
Yet as things are, the services of this class come into com- 
petition with those of the more needy ones, and cause inci- 
dental hardship. 

Notwithstanding all that has been said, where a woman 
hy superior energy or genius, makes eminent achievements ^ 
her services are apioreciated in full measu7'e according to 
the standard of men's work of the same hind. This is true 
especially of women's work in fine art. The female stars 
in music and the drama, such as Kellogg and Siddons — in 
painting and sculpture, such as Kosa Bonheur and Harriet 
Hosmer — in poetry and light literature, such as Mrs. 
Browning and Mrs. Stowe, have no reason to complain 
of the remuneration awarded by an admiring public to 
their productions. So too, occasionally we see a woman 
managing extensive business with great executive ability. 
In such a case, the reward is no whit short of that won by 
like energy on the part of the other sex. These exceptions 
however, rather prove than controvert the rule. And with 
the sole exception of vocal music, we fail to find in any 
department of art or business, women, reaching eminences 
so high that there are not men still above them. 

From all these considerations, we reach the following 
conclusions in answer to the question with which our dis- 
cussion opened. 

1. In the nature of things, there is some good, reason 
why the remuneration of uwrnen should generally fall heloio 
that of men for similar services. Absolute equality between 
the sexes in this respect, is not likely ever to be attained. 



WOMEIf'S "WAGES. 195 

They who contend for that extreme result, are fighting 
against nature's laws and assailing the only safe founda- 
tions of civilized society. 

2. This inequality, as a present matter of fact, is much 
greater than is either right or reasonaile or necessaryT^ 
The distress that comes from it, cries out therefore, in the 
name of justice and of philanthropy for relief. Efforts for 
relief put forth in the right direction, will not be unavail- 
ing. They may be prosecuted with good hope of success, 
and deserve encouragement and support on all hands. 

3. The chief aim of these efforts must he to hreah the 
tyranny of fashimi and prejudice and mawJcish sentimen- 
talism, and to open for ivomen, free access to all fit occujm- 
tions. Thus the sphere of competition will be widened 
and its intensity relieved. Under that tyranny, the se- 
verest ban is that imposed by women themselves on one 
another. A change of opinion in female circles, will be a 
change of public opinion. No satisfactory reason can be 
given why with women and with men alike, honest luorTc 
well done should not be always respected and honored. No 
great danger can come from giving the widest range of ex- 
periment for women to try their powers. When the bar- 
riers set up by the false whims of artificial society are 
removed, the native instinct of the sex may safely be 
trusted to choose fit and congenial occupations. Then 
the average rewards of labor, even at women's rates, will 
be raised at least, to the standard of general comfort. 

4. hi the quiet sphere of domestic life, woman renders 
to society her noblest, most blessed service. Tlie real worth 
of that service cannot be estimated in terms of current 
money. Its legitimate reward comes not in separate 
wages but in her rightful partnership, as a necessary 
helper, in all that man, the husband, the father, the 
brother, quickened, stimulated, sustained by her genial 
influence in the home, can gather on the world's open 



196 DISTRIBUTION". 

fields of struggle. When necessity carries her out to act 
for herself in those open fields, her true mission will still 
remain that of a Heljjer, not a Principal. The outlook of 
to-day is full of hope for the success of a Conservative 
Reform, which shall move on, safely balanced by a due 
regard always to that highest honor, to those most sacred 
rights of woman which centre in the true unit of society, 
the Home. 



CHAPTER XV. 

THE EEMUNERATION OF CAPITAL. 

Capital, as we have seen, is a factor, all-essential in 
the production of wealth. The most important forms 
which it takes in the process are two, viz., huildings, tools 
and machinery to work in and to work with, and materials 
to work upon. Labor and skill are unavailable till these 
are provided. En the process of production, capital in 
these forms is consumed. The materials are immediately 
destroyed. Buildings and instruments slowly but surely 
wear away. Hence, the first appropriations from the pro- 
ceeds of industry must be always to make good this loss, — 
to make necessary repairs, to buy new materials and thus 
to replace the capital consumed. Unless the business is a 
failure and must cease, this provision must first be made. 
The compensation of labor, the reward of capital and the 
profits must be reckoned after that is done. We here 
simply recognize this replacing of capital as a necessity. 
It forms no part of the remuneration of capital which we 
are now to consider. 

The Principle on -which the claim of Capital 
to Remuneration rests, is essentially the same as that 
which sustains the compensation of lahor. By its defini- 
tion, capital is the fruit of past labor preserved by self- 
denial to be employed in further production. One's right 
of property in that which he has earned and saved is inde- 
feasible, it is precisely the same as his right to his own labor, 
for his own labor may have produced this capital, and it is 



198 DISTRIBUTION". 

but simple justice that if the owner allows another to use his 
property instead of using it himself, he should be compen- 
sated. No man expects to put forth his powers in present 
labor without some reward. Why then, should one be ex- 
pected to give the use of the fruits of his past labor and self- 
denial without reward ? The hope of such reward is the 
special inducement for saving. Suppose John Smith to 
have health and strength and skill as a blacksmith, but no 
shop, no tools, no iron. James Brown has, by previous 
labor and thrift, become the independent owner of a shop 
and its appurtenances, but is broken in health and unable 
to work. Each is evidently helpless without that which 
the other can furnish. Both will derive advantage from 
the union of the two properties,— the personal qualities on 
the one hand, and the accumulated means on the other, — 
in other words, the labor and the capital. This may be 
done in either of two ways. Smith may hire Brown to 
work in the shop, and with his tools, and pay him stipu- 
lated wages, reserving from the proceeds of his labor, 
something for himself. Nobody can question the rightful 
ness of that course. Or, Brown may hire Smith's shop 
and tools for a stipulated rent, and after paying that, have 
for himself the surplus of all he can earn by his work. 
On what ground can the rightfulness of this course any 
more be questioned ? The latter method establishes the 
relation of lorrotuer and lender, as the former does that of 
employer and employe. It grows out of a common neces- 
sity. It yields a mutual advantage. A division of the 
joint result may give each the living he needs. The one 
lives by his present labor, the other lives by his past labor, 
that is, on his capital. Is not each an honest way of living ? 
Would it not be a grievous wrong for either to demand 
the benefit of the other's possession without paying for it ? 
This simple case illustrates the whole matter in all its 
varied and complicated aspects. The principle seems too 



RENT. 199 

plain to need even so much of exposition. But the Com- 
munist philosophy, so called, which denies the rights of 
capital, is gaining some acceptance even in our enlightened 
country, and its sophistry is best exposed by the clear 
statement of elementary principles. Everywhere, labor 
and capital enter into a partnership. He who provides 
the capital justly claims to share with the laborer in the 
re§ults of their union ; and the laborer can well afford to 
pay for the advantage he gains. 

It matters not in tvhat form the capital is furnished; 
the principle is the same. The laborer may, as in the case 
supposed, use the shop, tools, etc., of another for which 
he pays Rent. He may make a formal loan, borrowing 
money with which to purchase these things and paying 
Interest. The capital may be contributed by a hundred 
different persons, uniting in a stock-company, which 
through its agents employs a hundred other persons as 
laborers. It is in this last case, just as really a partner- 
ship, as though each laborer made a bargain with some 
one capitalist, but here the compensation for the capital 
comes in the form of Dividends. \ The remuneration of 
capital thus appears in these three forms, Rent, Interest, 
Dividends. We have said that the fundamental principle 
is the same in all, yet each form has some peculiar phases 
which require a distinct presentation. 

Rent, is the compensation paid for the use of capital in 
the form of land and its appendages, commonly called ReaU 
estate. Rent implies ownership of land. It belongs not 
to our science to discuss the abstract right of property in 
land, or to determine the basis of that right. It is enough 
here to say that the wealth which God has hidden in the 
vegetable and mineral resources of the earth cannot be de- 
veloped without some exclusive possession and control of 
the land itself. So too, the advantages of a particular 



200 DISTKIBUTION. 

location, as a place of residence or of trade, can be ap- 
propriated only in connection with a title of posses- 
sion to that piece of land. When appropriated, land 
must he reckoned as capital, partaking of the nature both 
of material to which labor may be applied, and also of an 
instrument of labor. Unless excluded by special provision, 
the title to the land carries with it all improvements and 
permanent structures put upon it, the term real-estate in- 
cluding all. The use of capital in this form, as well as its 
ownership, may be transferred, and rent is simply the 
compensation paid for such use. 

Several hinds of rent are indicated by different names ; 
the distinctions having originated mainly in the peculiar 
. features of the feudal-system and the laws of primogeni- 
ture and entail to which that system gave rise. Some of 
these may be mentioned in passing. A Rent-cliarge 
means a fixed sum paid annually as a commutation for 
military services or other obligations due from the occu- 
pant of land to its feudal proprietor. Quit-rent is a defi- 
nite reserve, specified in grants of land, by the annual 
payment of which the tenant is quieted or quit from all 
other services to a feudal lord. Metayer-rent is an equal 
division of the actual products between the cultivator and 
the owner of the land. Rach-rent is rent raised to the 
utmost by forced competition. Cottier-rents is a term ap- 
plied chiefly to the usage in Ireland, where sub-tenants 
rent each a cottage and an acre or two of land from the 
.small farmers, the amount of the rent being ordinarily 
paid in labor at a money valuation. Groujid-rent, a mod- 
ern term applied mostly to city lots, is compensation paid 
for the occupancy of the ground alone, the lease usually 
providing for an equitable valuation of the structures 
erected on it, with a view to their separate disposal, on the 
termination of the contract. 

In Great Britain, the influence of the old feudal system 



KICARDO'S THEOET. 301 

is still felt in the monopoly of the lands of the kingdom 
by a few families of the nobility and rich gentry, and in 
many restrictions on the transfer of titles. There conse- 
quently, the problems of rent are many and complicated, 
and English writers on political economy give large place 
to this topic. We need not follow their extended and 
elaborate discussions, since they are ill suited to- the condi- 
tion of things in our country. 

The famous theory of Ricardo, however, deserves a 
brief notice. His work on political economy is devoted 
chiefly to this subject, and the theory he propounds has met 
with general acceptance. Its leading idea is that rent ad- 
vances with the progress of society from the first settling 
of a country, when, on account of the abundance of fertile 
land, there will be no rent, up to the time when the neces- ' 
sities of the growing population compel the bringing into 
cultivation, at the expense of greatly increased labor, the 
poorest of the land. Tlie rent therefore, which any piece 
of land will yield is just the difference between the value 
of its products and the value of the products of the poorest ' ~ 
land in cultivation. The increase of population causes an 
increase of rent, and with the advancing rent, the cost of 
food must steadily advance. So by inference, this theory 
was made to sustain the Malthusian theory of population, 
which presents general starvation and wretchedness as the 
certain result in a not distant future, unless some restric- 
tions are laid on the natural increase of population. 

The elementary principle of this theory, that the rent 
of land for agricultural purposes, must depend chiefly on 
its productiveness is true. But the representation of the 
manner in which lands of different grades are brought 
under cultivation is ideal rather than real. The deduction 
from the theory can stand only on the assumption that 
the food of a country must be provided entirely from its 
own soil, limited in extent. The repeal of the corn-laws 



202 DISTRIBUTION. 

and the adoption of the principle of free-trade have shown 
that even England has little occasion to apprehend the 
sad consequences of the so-called Eicardo-Malthusian sys- 
tem. When all artificial restrictions are removed, the 
natural equilibrium of supply and demand will provide 
food for a people, irrespective of the more or less that may 
be raised within their own territory. Then too, the same 
law will determine the value of the products of the land, 
and rents will be adjusted accordingly. 

In our country, by the constitutions of most of the 
states, lands are declared to be allodial and feudal tenures 
are prohibited. The property-right to all lands rests 
upon a title in fee-simple, unencumbered by entails and 
mortmain holdings. This makes the ownership absolute 
iand its transfer easy and direct, free from burdensome re- 
strictions. At the same time powerful influences oppose 
the aggregation of great landed estates, and favor the 
acquisition of such property, in comparatively small tracts 
by the industrious and thrifty of all classes. Here there- 
fore, the principles of rent are very simple. For agricul- 
tural purposes, the rent of land is determined mainly by 
three considerations. 

1. Productiveness. Land is the instrument by which 
the farmer produces the various vegetable and animal sub- 
stances which he offers in exchange. 

'Like any other valuable instrument, it of course, com- 
mands a price according to its productiveness. He who 
hired a loom, would pay more for a loom with which he 
could weave twenty yards a day, than for one with which 
he could weave but ten yards a day. The case is the same 
with land. But the productiveness of land depends on 
two circumstances, viz., its Fertility and its Situation 
with respect to a market. 

a. Fertility. We all know that the productiveness of 



C01S"SIDEEATI0N"S AFFECTIN"G KEN"T. 203 

different soils is very diverse. Some soils will produce 
thirty, or forty, or fifty bushels of wheat to the acre, while 
others will produce, at the cost of more labor, not more 
than ten or fifteen bushels to the acre. Some soils will 
produce the most valuable vegetables ; and others, only 
the most common, and comparatively worthless. Some 
soils will produce no wheat whatever ; and others will, 
without manuring, produce a luxuriant crop every year. 
Some,. wholly unfit for tillage, can be used only for grazing ; 
and even when thus employed, yield to their stinted flocks 
but a meagre subsistence. Hence, we see a reason for a 
great diversity in the price of land. And we see at once, 
that a farmer might more profitably pay a rent for one 
farm, than occupy another farm for nothing. 

h. Situation. The products of the farmer are all 
bulky, and of course, acquire a very considerable addition 
to their cost by transportation. Hence, if A raise wheat 
within a mile of a market town, and sell it for one dollar 
a bushel, and B live one hundred miles off, and bring his 
wheat to the same market, he must sell it at the same 
price. The merchant who buys wheat can give no more 
than the market price for wheat, whether it has been 
raised near or far off. It is no more valuable to him for 
having been brought one hundred miles. If now, the price 
of bringing a bushel of wheat one hundred miles be fifty 
ceuts, B actually receives but fifty cents a bushel for his 
wheat, while A receives a dollar. If the farms of both 
were of equal fertility, that is, if both produced twenty 
bushels to the acre, the farm of B, would be only half as 
productive as that of A ; that is, he would receive only 
ten dollars per acre, while A received twenty dollars. 
This amount of difference in situation, would be the same 
as a difference of oue-half in fertility, or actual produc- 
tiveness. 

Hence, fertility being the same, productiveness will be 



204 DISTEIBUTION". 

as situation ; and situation being the same, productive- 
ness will be as fertility. And we see that these circum- 
stances will always, when opposed, counterbalance each 
other ; that is, land at such a distance from the market 
that it costs one half the price of products to transport 
them, will be of the same value, or actual productiveness, 
as land of half its fertility, contiguous to a market. 
And hence, in estimating the j)roductiveness of land, these 
circumstances are always to be considered together. And 
we see that land of the greatest fertility may be so far from 
a market, that the cost of transportation will leave a profit 
insufficient to repay the cost of cultivation. In such a 
case, such land will be worth nothing. 

The liighest degree of productiveness is realized when 
these tioo circumstances are comMned. Fertile lands near 
to a market always command a high rent. Internal im- 
provements which diminish the cost of transportation have 
the effect of thus combining fertility and situation. This 
has been one important cause of rapidly enhancing the 
value of agricultui'al lands in the valley of the Mississippi, 
where distance from the sea-board and the consequent ex- 
penses of transporting their produce balanced all the 
advantages of their superior fertility, until steam naviga- 
tion and railways were extended thither. 

In the settlement of a new country, another considera- 
tion has weight in the choice of lands first occupied. The 
most fertile lands and those most favorably situated may 
require great labor to bring them under cultivation, and 
hence inferior lands may be first selected. This however 
is only another aspect of the same principle. For in any 
branch of industry, our estimate of productiveness must 
take into account the cost of labor necessary to secure the 
product. No agricultural lands will command a rent, 
whose crops do not yield a surplus above what is necessary 
to support the laborer. While the process of clearing 



CONSIDEKATIONS AFFECTING EENT. 205 

heavily timbered land is going on, the crops will hardly 
keep the laborer alive, though the crops of subsequent 
years may yield a full compensation for that first cost. As 
these later returns come in, such lands yield rent which 
steadily increases until the full measure of its productive- 
ness is reached. , 

2. The Growth of Population and its concentration in 
new centres. This means only that whatever increases the 
demand for agricultural products, or in any way improves 
the market for them, enhances the value of the lands and 
warrants the payment of increased rents. The natural 
growth of a population devoted chiefly to agriculture mul- 
tiplies various wants which can be met only by some forms 
of mechanical industry and mercantile enterprise. Those 
who are thus employed, by necessity collect together into 
towns and villages. Thus a large population is collected, 
which raises nothing from the earth, and their wants must 
be supplied by the agriculturists in their neighborhood. 
Hence, immediate markets for produce are created in 
every district ; that is, altliough the farmer cannot remove 
his farm nearer to market, the market has removed nearer 
to him, and the diminution of distance has increased the 
productiveness of his farm, as much as though its fertility 
had been increased, or it had been removed to the sea- 
board. Thus, within fifty years after it was occupied by 
farming emigrants, Western New York was studded with 
villages, many of which soon grew into large cities. The 
same thing has been illustrated on a still larger scale in the 
rapid increase of population and wealth through all the 
western states. With all this development, agricultural 
lands have increased in value, and command rent accord- 
ing to their proximity to the new markets thus formed. 

The development and use of water-poioers and other 
facilities for manufacturing has the same effect. Such 



206 DISTRIBUTION". 

enterprise brings in a rapid increase of population by im- 
migration, who must be. to a considerable extent, fed by 
the products of land in the vicinity. Agricultural and 
manufacturing industry have thus a most intimate relation 
to each other, and tlie free growth of both in near prox- 
imity, promotes tke most general and genuine thrift. By 
the forming of such near markets, lands of inferior fertility 
may come to bear a considerable rent, because every such 
community requires large supplies of vegetable products 
which do not well bear long transportation. The develop- 
ment of manufacturing industry in New England has 
thus kept up the value of her poor farming lands in spite 
of the competition of the richer soils of the west, which 
through facilities for transportation have sent on immense 
quantities of produce. It will not pay for the 'New Eng- 
land farmers to raise wheat, but for potatoes and other 
vegetables, bulky and perishable, needed in the manufac- 
turing towns close by, they have a market of their own, 
which sustains the value of their lands. 

3. Bents are affected hy some Incidental Circum- 
stances. 

a. Natural Beauty of Situation adds to the value 
of a farm. Of two farms equally prodvictive, many 
men would give a decided preference to that which com- 
manded a view of the richest and most beautiful prospect, 
or of which the trees and shrubbery were so arranged, as 
to give the greatest pleasure to the beholder. For this 
preference, most men would be willing to pay an additional 
"price. This additional price will increase with the wealth 
and the improving tastes of the community. This is a 
circumstance which should always be borne in mind by 
the occupiers and owners of land. It costs but little more 
labor to lay out an orchard regularly and beautifully, than 
to lay it out irregularly and clumsily. It costs nothing to 



COKSIDERATIONS AFFEC'TING EENT. 207 

let a tree stand where it adds beauty to a prospect, and 
it costs very little to plant one, where it will have the 
same effect. A neat and convenient house consumes 
neither more lumber nor nails, nor labor, than a slovenly 
and inconvenient one. And yet on these differences, very 
much of the value of a farm depends. 

h. The value of land depends much on the Intellectual 
and Moral Character of the Neighborhood. 

Of two farms of equal productiveness, but in very dis- 
similar moral and intellectual communities, almost every 
one would prefer that which, in these respects, possessed 
the greater advantages. A man who has in any degree 
cultivated his own intellect, prefers the society of those 
whose intellects are also cultivated. A parent would 
always prefer a neighborhood in which his children would 
receive the advantages of education. A man who had 
been aocustomed to religious observances, would choose to 
reside where he could enjoy the benefits of religious in- 
struction. And every man, let his dispositions be what 
tliey may, will choose to live in a neighborhood, in which 
the moral character of the people is a protection from dis- 
honesty and I'obbery, and where his children will be, aa 
little as possible, exposed to the contaminations of vice. 
It is manifest that each of these considerations would 
form aground of preference, for one situation over another, 
and for this preference, every reasonable man would be 
willing to pay. Were two farms thus differently situated, 
there would be many more buyers for the one than for the 
other, and the advantage would all be on the side of the 
most intelligent and moral community. 

Hence we see that, besides the advantages whicli intel- 
ligence and virtue confer upon the character of a people, 
ihere is also an additional advantage in the increased value 
of property which they produce. It may be fairly ques- 
tioned, whether this, of itself, be not sufficient to repay the 



208 • distributio:n". 

whole expense of literary and religious institutions. There 
are towns in New England in which, in a few years, the 
price of real estate was doubled, for no other assigna- 
ble reason, than that of the literary and moral advantages 
which they hold out to residents. This mode of increas- 
ing the value of proj)erty, is deserving of more attention 
than it has generally received. 

c. Improvements put upon the land are also to be 
taken into account. Under this term are included drain- 
age and fertilizers applied to the soil, the benefit of which 
runs through a series of years ; also fences, barns and other 
outhouses and a residence for the family. These things 
are indispensable to successful agriculture and every addi- 
tion increases the utility and desirableness of the land. 
The unthrifty appearance of a farm whose improvements 
are neglected and run down, is in itself repulsive, enough 
so, often, to overbear other considerations. One is hardly 
willing to stop and inquire about the intrinsic fertility of 
such a piece of land. He will fix his choice rather on even 
wild land, untouched, at least unmarred by the hand of 
man. 

It is to be observed however, that where the improve- 
ments are in excellent condition, rarely is the value of the 
land, indicated by either rent or purchase-price, increased 
in proportion to the expenditures laid out on these im- 
provements. The reason of this is that, with respect to 
some of these outlays, the benefit is hidden, not apparent 
to the eye, as in the case of drainage and fertilizers ; 
respecting others, as of the barn and the dwelling, every 
man has his own taste, and what may have been of great 
interest to the original proprietor, may fail to be apprecia- 
ted by a purchaser or tenant. Often a dwelling house 
is erected costing as much as the whole farm without it is 
worth, thus doubling the capital invested. But all this 
will add nothing to the actual products, the matter of 



RENT OF MIIflKG LANDS. 209 

chief consequence in tlie mind of one proposing to buy or 
rent the place. 

It must be added that in this country, almost invaria- 
bly, rented farms are rapidly deteriorated with respect to 
both fertility and improvements. The temporary tenant 
seeks to realize the largest profits from immediate harvests, 
having no interest in the continued productiveness of the 
land. Hence, unless he is occupying the farm on long lease, 
he will not spend much in enriching the soil or in keeping 
buildings, etc., in repair. To avoid this deterioration, the 
terms of the lease are sometimes so drawn as to require 
certain outlays annually, to keep up the land and its ap- 
pendages. 

For Mining Lands rent is determined almost entirely 
by productiveness, real or prospective. On the first dis- 
covery of mineral treasures, the value of the land in which 
they are found, is at once increased according to the profit 
anticipated from working them out. 

Suppose a farm to be worth the ordinary price of land ; 
and the owner discovers on it a bed of iron ore which, 
after deducting the necessary expenses of working it, and 
paying the labor and skill necessary to the operation, will 
yield one thousand dollars a year. The farm or the land 
necessary for the mining operations will rent for one thou- 
sand dollars a year, or will sell for such a sum as will yield, 
at the ordinary rate, one thousand dollars as interest. In 
this case it is manifest that the original owner of the prop- 
erty will be a gainer by the discovery, to the full amount of 
the increase in the price of his land. But here the jjeculiar 
gain ceases. To other holders who may come after him, 
it is merely an investment of the same nature as any other 
investment, and will yield no more than the ordinary rate 
of profit. 

The case is the same with a copper, a silver, or a gold 
mine. The owner of the land at the time of the discovery. 



210 DISTRIBUTION". 

becomes greatly enriclied, in consequence of this new pro- 
duct, which may be derived from his property. But after 
this rise, when a new purchaser comes into possession, the 
peculiarity of the gain ceases. A rich gold mine will rent 
or will sell for more than a poor one, and its price or its 
rent, will be in exact proportion to its productiveness, just 
as a farm, a mill privilege, or any other property. It is a 
somewhat remarkable fact, that mines of the precious 
metals are in general, singularly unprofitable, after they 
have passed out of the hands of the original owners. It 
has grown into a proverb in South America, that if a man 
own a copper mine he will grow rich, if he own a silver 
mine he will gain nothing, but if he own a gold mine be 
will certainly be ruined. The fact, however, may be easily 
accounted for. The imaginations of men are always 
strongly excited by the contemplation of the precious metals, 
and it is rare that anything but experience can teach 
them, that they may buy gold too dear. Hence, they do 
not compute the chances of profit in the pi-oduction of 
gold, as coolly as they do in any other case. But the pro- 
duction of gold is governed by as fixed laws as the produc- 
tion of wheat. Gold cannot, any more than wheat, be 
produced by an effort of the imagination. It is the result 
of labor and skill and expense. And if these be greater 
than the revenue, a man will as assuredly be ruined by 
producing gold, as by conducting any other unprofitable 
business,' his imagination to the contrary notwithstanding. 

In cities, where population is concentrated within nar- 
row limits, rents for lots and buildings are determined 
almost entirely by location, with respect to facilities for 
business, the social character of the neigliborhood, and the 
freaks of fashion. A man needs a house which will furaish 
the necessary conveniences for his family. He also wishes 
one within a convenient distance from his place of employ- 



EEN"T OF CITY LOTS. 211 

ment. The further his dwelling is removed from his store 
or his counting-room, the longer time is occupied in pass- 
ing from the one to the other, and the less are the conve- 
niences of his residence. Hence, he will be willing to pay 
for the choice, and thus the price of land gradually di- 
minishes from the centre to the circumference of a thickly 
settled town. Often also, he is willing to pay an extra 
price for a residence in a respectaUe, or fashionable quar- 
ter of the city. 

In a place of great commercial activity, another class of 
buildings is needed for the transaction of business. Where 
many exchanges are to be made in the course of a few 
hours every day, it is of importance that the exchanges 
should be as near together as possible. And where a large 
number of strangers is daily collected for the sake of mak- 
ing purchases, it is important to the seller to be so situa- 
ted as to be in their immediate vicinity. A merchant 
whose store is in the centre of business, can easily sell ten 
times as much in a day as one who is half a mile off from 
the centre. Hence, he is able from the mere fact of differ- 
ence in situation, to realize a much greater annual profit 
in the one place than in the other. For this difference 
of productiveness, he will be willing to pay a price ; and 
hence, in large cities, the most central situations, or, as 
they are called, the best stands for business command a 
very high rent, and a corresponding price. A few squares 
feet of land in the centre of the city of New York, will 
sell for more than many acres of the most productive soil 
in any part of the Union. And as the price of land in 
such cases, is owing entirely to the demand for the pur- 
poses of facilitating trade, it can only rise with the increas- 
ing prosperity of the place. Hence, the rise or fall of real 
estate in any town, if it be truly a rise in value, and not a 
rise from speculation, is one of the surest indications of its 
mercantile prosperity, or of the reverse. 



212 DISTEIBUTION-. 

With the growth of cities, the centres of business are 
subject to change from time to time, occasioned sometimes 
by the need of enlarged space, often by the mere whims of 
fancy or bold speculation. Forty years ago, most of the 
jobbing business in New York was done in Pearl Street, 
and property on that street commanded the best rents in 
the city. In course of time, that branch of business was 
transferred to another quarter, and Pearl Street stores to- 
day, rent for a small fraction of their former rates. The 
bold speculation of one man had the effect to transfer the 
fashionable retail business of Chicago, from Lake Street to 
State Street with a corresponding revolution in rent. Par^ 
ticular branches of business are apt to concentrate, each in 
its own part of a city, and often for reasons which nobody 
can explain, and in spite of great inconveniences. Thus 
more or less of uncertainty is attached to city property 
rented for business, and this fact must be considered when 
capital is invested in that way. 

The remuneration of capital in the form of real-estate 
is, except in the favorite locations of great cities, generally 
less than the average rate of profits from business. We 
may name several reasons for this difference. 

1. Property in land is considered more secure than any 
other property. The principal may be considered inde- 
structible. Hence, it is the safest of all investments, and 
nothing is paid for the risTc. 

2. The title to lands can he more definitely^ secured than 
that of any other property. The legal instruments by 
which it is secured to the individuals, are a matter of pub- 
lic record. The boundaries of -land can be, and commonly 
are, ascertained with entire precision. The land itself can 
not be removed. Hence, the ownership of it can be always 
ascertained and conveyed to posterity. 

3. Men generally derive some influe?ice and considera- 
tion fi'om the ownership of land, which they do not derive 



KENT LESS THAN OEDINAKY INTEEEST. 213 

from any other possessions. Formerly, the right of suf- 
frage was restricted to landholders. The existence of this 
rule shows the degree of consequence whiclvattached to 
this sort of possession. And the fact that it has so fre- 
quently existed, while the contrary rule has never existed, 
shows the general tendency upon the subject. 

4. There seems to be in the human race a strong dispo- 
sition to become the oimiers of land, and a natural love for 
the pursuit of agriculture. Men of all professions look 
forward to some period of life, in which, relieved from the 
toils of business, they njay retire to the quiet country. 
To whatever extent this disposition exists, it of course tends 
to raise the price of land above that of other property, 
paying the same rate of profit. If a man receive a part of 
his remuneration in pleasure, he will be content to receive 
less in the form of money. 

5. The 7iattiral progress of society te^ids to increase the 
value of landed property. This has been already illustrated 
in general, in the remarks which have been made upon 
rent. And it must be evident that, land remaining the 
same, and the population continually increasing, the de- 
mand for land must continually increase. And, besides 
this, the progress of society creates not only a more exten- 
sive demand for land, but a much greater variety of de- 
mands. As such is the tendency, men are willing to hold 
land at a less interest than other property, in the hope 
that the rise of price at some future time, will compensate 
for their present loss. Thus men frequently invest money 
in wild lan-ds, expecting to reap no profit from them for 
many years, but calculating upon a rise of price at some 
time or other, which shall abundantly repay both princi- 
pal and interest. 

Property in land cannot be run away with, nor destroyed 
nor fraudulently disposed of. Meantime, while society is 
advancing, its bottom-value steadily increases. In cases 



S14 DISTRIBUTIOlf. 

not a few, we have seen a small capital, in this way grow 
into a fortune. For this reason, an owner of city-lots is 
willing for a very moderate ground-rent, to grant others 
the privilege of building on his land, since he runs no risk 
and has the benefit of increased value at the end of the 
lease. The only drawback is in the liability to excessive 
taxation by corrupt "rings" in city-governments. 



CHAPTER XVI. 



INTEKEST. 



Interest is the compe?isation paid for the use of money 
horroived. The most convenient form of capital to be 
loaned, for both lender and borrower, is money. Loans 
are therefore most commonly made in money. Interest is 
always reckoned at a certain per cent of a defined sum of 
money, which is called the principal. The percentage 
agreed on is called the rate, and is usually stated as the 
rate per annum, though often payable at shorter intervals 
than a year. In cases where other kinds of property are 
transferred, while payment is deferred, an estimate is com- 
monly made of the value in money, and interest is charged 
accordingly on the deferred payment, at the current rate. 
When credit is extended in any way beyond a limited 
time, the value involved is set down in terms of money, 
and interest on the debt is reckoned at some rate agreed 
on by the parties. Thus one may buy land for a site, and 
have a building erected on it, and purchase a steam-engine 
and machinery for a mill, and cotton to be worked up in 
the mill, and at each step give his note, for a part of the 
value, to be paid at a certain date, with interest. Or, in- 
stead of doing this, he may borrow of a friend the money 
which will meet his deficiency, giving his note for the 
whole on interest ; and then set up his establishment com- 
plete by purchases made for cash. The transactions are 
essentially the same. The land, the mill, the engine and 
the cotton are what he wants, and what he actually bor- 
rows and uses as a part of the capital of his business. In 



216 DISTEIBUTIOIf. 

one way or the other he becomes owner of the property, 
but debtor to some party for its value, and, since it is con- 
templated that the debt will be paid in money, it is essen- 
tially the same as if the credit were given in the form of 
a money-loan. 

Hence, interest is commonly called the price for money. 
It is evident, however, that it is not the money, but the 
capital which is wanted ; because as soon as the man 
obtains the money he at once exchanges it for capital. 
This, therefore should always be borne in mind, that when 
we speak of the price of money, we mean the price of 
capital, which the money represents and for which it is 
always exchanged. It is evident that the laborer may 
derive very great benefit from the loan of money, that is, 
of capital. He is thus enabled to employ advantageously 
all his skill : and thus a loan for a few years is very fre- 
quently the commencement of a fortune. Hence we see 
how very absurd is the prejudice so commonly excited 
against mone3^-lenders and money-lending institutions. 
Were there no money-lenders, there could be no money- 
borrowers ; and were there no money- borrowers, the indus- 
trious artisan would surely be the greatest sufferer. It is 
not denied that the money-lender loans for his own advan- 
tage. But is it any more odious for one man to lend for 
his own advantage, than for another man to iorrow for his 
own advantage ? It is not pleaded that the one, any more 
than the other, is benevolent. This is quite another ques- 
tion. All that is pleaded is, that both, in so far as the 
things themselves are concerned, are equally honest and 
honorable. In both cases the man benefits himself while 
he benefits others ; and this is all that can be said in favor 
of any other exchange. It is not of course denied, that 
the lender may be oppressive, tyrannical and avaricious ; 
nor that the borrower may be fraudulent, indolent, and prof- 
ligate. But this does not affect the nature of the transac- 



IKTEEEST. 217 

tion -per se. "We here speak of the thing itself, and not of 
the manner in which either party may act, in consequence 
of or in connection with it. 

The term "interest" is a Latin verb in the impersonal 
form, and means it is of advantage. Eecognizing the nat- 
ural and necessary j)artnership of capital and labor in pro- 
ducing, wealth, the term implies always a mutual advan- 
tage to borrower and lender. This interest, or mutual 
advantage marks the prime difference between a loan and 
a gift. It is therefore, altogether equitable that capital 
loaned, should be paid for. Interest is no extortion, and 
no unreasonable demand. It is for tbe advantage of the 
skilful laborer to borrow at a reasonable interest, as much 
as it is for the advantage of the capitalist to loan ; and it 
is as much for the advantage of the laborer as the capital- 
ist, to enter into that partnership, by which they share the 
profits of the operation between them. It is by reason of 
this partnership, that the laborer receives the wages of 
sTcill, instead of the wages of xsiqxg, pliysical force ; and the 
capitalist is able to employ all his capital in production, 
instead of employing only that 'portion of it which he could 
employ with simply his own personal industry and skill. 

When money is borrowed to provide for the immediate 
support of an individual or a family, or for some present 
gratification, the property which it represents is consumed 
at once without returns of added wealth ; but the loan is 
made in some anticipation of means to be realized from 
labor or other sources at a future day, and the considera- 
tion is even then, a supposed advantage to the borrower as 
well as to the lender. 

Loans made to an extravagant spendthrift who has 
property, simply anticipate the avails of that property, to 
be sold at a future day. On the side of the borrower, 
present indulgence is the only advantage ; if there is no 
property to secure the loan, it is to the lender, all the same 
10 



218 DISTEIBUTIOI<r. 

as money thrown away. When a loan is asked to reliere 
the immediate needs of one reduced to poverty, the appeal 
is to one's benevolence rather than to his interest. If the 
favor is granted, though for form's sake or to relieve the 
sensitive feelings of the applicant, a promise to pay with 
interest may be accepted, it is really an act of charity, and 
may as well be so accounted. 

The leading Considerations vrhioh determine 
the Rate of interest, are four, viz., Rish, Convenience 
of Investment, Productiveness of Capital, and the Ratio 
hetiveen Supply and Demand of Capital. 

1. Rish. A loan is made on the promise of future pay- 
ment. There is always a risk that the promise may fail. 
The rate of interest must be adjusted to the degree of the 
risk. He who would loan to one man at six per cent when 
he was sure of being repaid, surely would not loan to 
another man at the same rate, when there were fifty chan- 
ces in a hundred that he would lose both principal and 
interest. At any rate he who did so, would very soon cease 
loaning altogether. 

This risk depends upon several circumstances. 

a. There is a difference in risk, arising from the differ- 
ent modes of employing capital. For instance, property at 
sea is more liable to destruction than property on land. 
Hence, the ancient Athenians made a difference between 
land and marine interest. The former was at twelve, and 
the latter as high as sixty per cent per annum. Property 
in merchandise is more liable to be destroyed, than prop- 
erty in houses ; property in houses than property in farms. 
A house in the country is safer than a house in town ; 
and a stone house is safer than a wooden house. Property 
employed in the manufacture of cotton, is less liable to be 
destroyed than property employed in the manufacture of 



INTEREST AFFECTED BY RISK. 219 

gunpowder. Now when a capitalist makes a loan to be 
invested in some one of the above forms of capital, and his 
only security for payment consists in his hold upon the 
property in which it is invested, it is evident that his 
risk, other things being equal, will depend upon the safety 
of that property. Hence, it is reasonable that his remun- 
eration for risk should correspond with the greatness of 
that risk. 

5. The second circumstance which enters into risk, is 
the personal character of the horroiuer. This is made up 
of industry, skill, knowledge of business, pecuniary ability, 
and moral character. When these have not been tested, 
or where, having been tested, they have been found insuffi- 
cient to the safe conduct of business, there will be a corre- 
sponding indisposition to loan to a man of such character, 
because every one feels that there is in this case, more than 
usual risk. Hence, such a person cannot borrow, vmless 
at an advanced premium, or at a liigher rate of interest. 
On the contrary, if a man has conducted an extensive busi- 
ness for a long period with undeviating success, he attains 
to a high mercantile credit, and is enabled to borrow 
money at the lowest rates. But if a merchant is known 
to be frequently embarrassed, if he has ever, especially more 
than once failed, mercantile confidence in him is destroyed. 
No one will lend him, except on the most unfavorable 
terms. 

These two causes of variation of risk are apparently 
modified by the practice of endorsing private notes. If I 
want money for the most hazardous investment, or am of 
the most doubtful credit, if I can offer my note endorsed 
by persons of established mercantile character, it is raised 
at once to par ; that is, the extra risk is immediately 
removed. But this modification is only apparent. The 
endorser will rarely do this for nothing. He either him- 
self receives a premium for it directly ; that is, he is paid 



220 DISTEIBUTIOK. 

for taking the risk of default of payment ; or else two per- 
sons mutually endorse for each other, and thus, the risk 
which A assumes for B, is paid for by B's assuming a 
similar risk for A. It is singular that any one should ever 
ask another to endorse his note merely as a matter of 
comity. It should always be a matter of business, and be 
paid for like any oilier business transaction. A merchant 
should no more ask another to endorse his note gratui- 
tously, than he should ask him to insure his house gratui- 
tously. The nature of the transaction is precisely the 
same. The risk in the one case, is frequently as great as 
in the other, and it should always, as much in the one case 
as in the other, be a matter of compensation. 

c. The risk incurred in lending capital, is affected hy 
the character of the Government. This affects both private 
and j)ublic contracts. 

If justice is well administered, and every man has 
all reasonable security that he will have the whole power 
of the society at his disposal, in order to enforce a Just 
contract, of course the risk is less, and the rate of interest 
lower, than when experience has shown that no such 
security exists. Hence, we see the economy of good legis- 
lation, and of a wise, just, and incorruptible judiciary. 
The additional interest on capital, incurred in consequence 
of the bad administration of justice in a country, would 
annually pay the expenses of all the courts of law, ten 
times over. 

The same results flow from confidence, or the want of 
confidence in the stability of' a government. A revolution 
not unfrequently dissolves contracts, dissipates security, 
and renders obligations valueless, both by destroying the 
evidence of their existence, and annihilating the means of 
enforcing them. Hence, when such an event is feared, 
men will not loan, except at an exorbitant premium ; and 
they generally prefer removing their property to some 



C0IfYE2nEl!rCE OF IKVESTMElirT. 221 

other country, to subjecting it, for any premium whatever, 
to the risks of a revolution. 

The same may be said of fullic contracts. Govern- 
ments, in whose stability and good faith undoubted confi- 
dence is reposed, borrow the most enormous sums at the 
lowest rates of interest. Those which are in daily danger 
of being overthrown, can scarcely borrow at all, or, if they 
do borrow, it is at the most ruinous premium. The South 
American governments can scarcely borrow at any interest. 
Great Britain, notwithstanding her present enormous debt, 
borrows at three or four per cent to any amount she 
pleases. Nay, so great is the piiblic confidence in her per- 
manency and integrity, that probably there is scarcely a 
civilized nation on earth, which does not at present own 
some share of her national debt. The greater the civil 
commotions of other countries, the more easily can she 
borrow, because capitalists naturally invest their property 
where they are confident of its security, and confident that 
its interest will under all circumstances, be regularly paid. 

2. The rate of interest is varied by the Convenience of 
the investment. The convenience of an investment depends 
upon several circumstances. 

a. Facility of transfer. When a man loans capital, 
he is of course ignorant of the future, and does not know 
how much he may need it at some subsequent time. If he 
loan at six per cent for two years, he may in six months 
find some investment in which it would yield him eight 
per cent, but having loaned it for two years he cannot now 
withdraw it. Hence, it is a great advantage if it can be 
so invested that he may without loss, recall it at any 
moment. 

t. Permanency of investment. If a man does not wish 
to withdraw a loan, it is an advantage to him to have it 
continue for a long period, because he is thus saved the 



223 DISTRIBUTION. 

loss of interest whicli would occur during the time of trans- 
fer, and the trouble and inconvenience of finding another 
borrower. This is of special benefit to widows, orphans, 
persons retired from business, and all those persons who 
wish not to labor with their own capital themselves, but 
only to live upon the interest of it. 

c. Punctuality in the payment of interest. It is a 
great convenience to those who invest capital to be able to 
calculate with certainty on the payment of interest. They 
can thus with ease, adjust their expenses, both to the 
amount of their income, and to the time of their receipt 
of it. If they wish to re-invest the interest, they can 
make their arrangements with certainty, and thus in- 
vest it with the greatest advantage. They are also 
saved the trouble of looking after their debtors, and 
they avoid the inconvenience of that personal alterca- 
tion, which is liable to arise respecting pecuniary trans- 
actions. 

When any form of investment combines these advan- 
tages, men are found to prefer it to one which is destitute 
of them, and they will loan their money on these terms at 
a lower rate of interest than on any other. Debts in this 
form are said to hQ funded, and the creditors are said to 
hold stoch. Public debts are generally thus arranged. The 
various companies formed for banking purposes, and pur- 
poses of internal improvement, are constructed on the same 
principles. - Every one who contributes a certain amount 
toward the capital of such a company, receives a certifi- 
cate that he owns such a share of that capital. He is en- 
titled to his portion of the profits at stated times. He 
may retain this certificate himself as long as he pleases, or 
he may sell it at any moment, to any purchaser who may 
want it. Hence, money may always be borrowed under 
these circumstances, at the lowest rates. 



INTEREST AFFECTED BY PEOFIT OF CAPITAL. 223 

3. The rate of interest is affected by the Productiveness 
of Capital. 

When the risk is the same, we find interest higher in 
some countries than in others, and higher in the same coun- 
try at one time than at another. Thus, when the security 
is equally good, interest is higher in this country than in 
Great Britain, and in this country it is higher in the new 
than in the older states. And, we also find that it is lower 
now in Great Britain than formerly, and that it generally 
becomes less as a community grows older. Much of this 
difference depends on the average Profit of Capital. The 
profit of capital is that annual value which it yields to the 
possessor, after he has deducted the principal, and paid 
the expenses incident to his actual operation. Thus, if by 
the use of one thousand dollars a year, I am, after re- 
placing the principal and all the cost of my operation, one 
hundred dollars richer, this one hundred dollars is the 
profit of my capital. Now, the greater this is at any time, 
the greater will be the sum which I shall be willing to pay 
for the use of one thousand dollars. If by the use of capi- 
tal, I can, after paying all expenses, realize twenty per 
cent, I can afford to pay more for the use of it, than if, 
after paying all expenses, I could realize only five per cent. 

We may specify a few of the causes on which the dif- 
ference of profit of capital depends. 

a. Fertility of Land. He who wishied to borrow 
money to invest in agriculture, could afford to pay higher 
interest when the land produced fifty bushels to the acre, 
than when it produced only twenty-five bushels to the acre, 
provided he could procure the land for the same purchase 
money. 

h. Productiveness of Industry. The use of natural 
agents adds greatly to the value annually produced from a 
given amount of capital. This will tend to raise the price 
of capital, since a man will give more for money to in- 



224 DISTEIBUTIOK. 

vest in a maeliinG which will produce one thousand dollars 
a year, than in one which will produce only five hundred 
dollars. It is true that the influx of capital will tend to 
bring any one branch of industry in process of time to the 
general level. But that progressive increase of productive- 
ness, which belongs to the progress of civilization, tends 
to keep up the price of capital, which would otherwise fall 
unreasonably low. 

c. The Demand for Exchange. The greater the demand 
for exchange, the more profitable must be that capital 
which is invested in exchange. In a town where mercan- 
tile business is brisk, and a man can sell all his stock at a 
good profit two or three times in the course of a year, 
money will bear a higher interest than in a town where 
exchanges are slow, and he must keep his goods on hand 
for a year or more. 

4. The rate of interest is especially affected by the 
Ratio behoeen Supply and Demand of Capital. This pro- 
duces the same effect upon the rate of interest as upon 
everything else. Whatever be the profit of capital, if the 
supply be very small, the price will rise in proportion, 
since he who, by employing it at a high price can make a 
small profit, will rather so employ it, than, by doing with- 
out it, make no profit at all. Thus if, by the use of one 
thousand dollars for a year, I could realize three hundred 
dollars, I might be willing to pay two hundred for the use 
of it, rather than not to have it ; for in the latter case I 
should gain nothing. If then, there were but little capital 
in the market, and many persons were as willing to give this 
rate of interest as myself, I should be obliged to give it. 
But if on the contrary, there were many persons desirous 
of lending, and there was much capital in the market, and 
I were the only person who would be willing to give this 
interest, they would underbid each other, and I should be 



INTEREST IIS" A NEW COUNTRY. 225 

able to procure it of him who would loan it to me at the 
lowest rate. I might then be able to borrow it for one 
hundred and fifty, one hundred, or even sixty dollars per 
annum. 

In a new and prosperous country, interest is always 
high. This results from several reasons affecting the ratio 
of Supply and Demand. 

1. Land is very cheap,' and at first is all of very nearly 
the same market price. In many cases it can be had for 
almost nothing. 

2. Land is very fertile. The produce of a soil when 
new is generally greater than ever afterwards. 

3. The soil, not at first needing manure, requires but 
small investments of capital, and these are very richly repaid. 

4. The inhabitants of a new country can carry with 
them but few of the conveniences of .life. These must be 
purchased after they arrive there, and must either be made 
on the spot, or be imported. Neither of these can be done 
without capital. And as the demand for these conve- 
niences is imperative, and as the income of land is abun- 
dant, the settlers are willing to pay a high price for them. 
Hence, the profit both of mechanical and of commercial 
labor is very great, and the price which is paid for capi- 
tal is very high. 

5. The Inhabitants of a new country have generally 
very numerous exchanges with the aborigines. Such ex- 
changes are exceedingly profitable. But these cannot be 
carried on without capital. These facts all tend to create 
a great demand for capital. 

On the contrary, the supply of capital in a new coun- 
try is generally small, because emigrants are by no means 
the most wealthy classes of a community. Those who are 
living in peace and prosperity at home, are not generally 
the most willing to brave the perils and hardships of the 
wilderness. 

10* 



226' DISTEIBUTION. 

Furthermore, those who are not inclined to expose 
their persons to the hardships of a new country, are not 
inclined to send their capital where they are not present 
to watch over it themselves. Hence, it is diflBcult for a 
while, for a new people to borrow, and they can overcome 
this difficulty only by the payment of a high interest. 

These are the causes of the high rate of interest in new 
countries on the borders of civilization, and generally, 
wherever savage and civilized nations intermingle. 

As a country becomes settled, however, these causes 
begin to operate less powerfully and thus the rate of in- 
terest gradually diminishes. 

1. The annual produce of the earth is, year after year, 
changed into fixed capital, and thus the demand for capi- 
tal is met in part by a home supply. 

2. The fertility of the soil diminishes, so that it is ne- 
cessary to pay less interest. 

3. Land is sold at different prices, according to its fer- 
tility, and as it rises in price, the degree of profit to the 
purchaser is diminished. 

4. The wants of the natives are supplied, and hence, 
one source of gain is dried up. 

5. A more perfect knowledge of the country, and more 
perfect confidence in its prosperity, diminish 'the unwil- 
lingness of persons in older countries to loan, and hence, 
capital from abroad may be procured with greater facility ._ 

The gradual operation of these causes must tend to 
reduce the rate of interest in different countries to the 
_same average. Yet there are always in each country or 
section of country, peculiar circumstances which fix for a 
period, longer or shorter, what Mr. Fawcett calls "some 
point of steady equilibrium about which the current rate 
of interest in that country, oscillates. " Thus in England, 
for many years, the average rate has been about three and 
a quarter per cent, in Holland it stands as low as two per 



IK"TEREST AFFECTED BY FEEEDOil OF CAPITAL. 227 

cent, in 'New England and New York it is six or seven 
per cent, in Wisconsin and Illinois it long stood at ten 
per cent, but is now evidently declining. 

The constant tendency of civilization, is to the reduc- 
tion of the rate of interest, because wealth increases rapidly, 
and risk is diminished by more perfect securities. As 
capital becomes more abundant, in proportion to the uses 
that are to be made of it, it commands a less price, that 
is, a man can gain less than formerly with a capital of one 
thousand dollars, and hence, he is willing to pay a less 
interest for it. But it is also to be remembered that a 
much larger proportion of men are worth one thousand 
dollars than formerly, and that for one that was worth one 
thousand dollars fifty years ago, there are fifteen or twenty 
who are worth ten thousand dollars now ; that is, men 
with the same labor are able to secure as many or more 
comforts than formerly, but they are obliged to do it by 
the use of a larger amount of capital. They are obliged 
to labor with a larger capital, but that large amount is as 
easily procured as a less amount was formerly. The com- 
plaint so frequently heard of the increasing difficulty of 
accumulating property, is really unfounded ; and taking 
the difficulty or ease of procuring capital into the account, 
the more advanced periods of society are as favorable as 
any to the industrious classes. 

The best adjustment of supply and demand depends on 
the freedom of capital. By freedom, of capital, is meant 
the unfettered liberty of the individual to employ his capi- 
tal in any innocent way that he pleases. When this lib- 
erty is enjoyed, every one chooses that way in which he 
supposes that he shall be most successful. The larger the 
profit he realizes, the larger will be the interest which he 
will be willing to pay. When he is obliged to withhold it 
from a mode of investment which he prefers, and to em- 
ploy it in one which he does not prefer, he must divert it 



238 DISTRIBUTION". 

from a more to a less profitable mode of inTestmeiit. 
Hence, as he is obliged to employ it in a less profitable 
instead of a more profitable investment, he can afford to 
pay less interest, and the price of interest, by the effect 
of this interference, must fall. Such must be the effect of 
all monopolies, and of all means by which the active 
power of capital is diminished. 

What has been said brings us to the following general 
conclusions : 

1. That, other things 'being equal, interest will he high 
when the risk is great, and loiv, ivhen the rish is small. 

2. That interest will ie high, when the profit of capital 
is great, and loto, lohen the profit of capital is small. 

3. That loth of these affect each other within certain 
limits; that is, when profit is great, if the risk be also 
great, interest will be very high, because the increase of rish 
diminishes the supply. 

4. But when profit is low and the risTc is great, there 
will be no loatiing whatever, because what is paid for risk, 
will be more than can be gained by use, and men could not 
profit by borroiving. 

The rate of interest will be always affected by every 
circumstance which affects either rish or profit of capital. 
War, or the rumor of war, by increasing the risk, raises 
the rate of interest in property affected by it. In prop- 
erty not affected by it, the same cause depresses the rate 
of interest, because it diminishes the means and oppor- 
tunity for production, and of course diminishes the profit 
of capital. On the other hand, the discovery of any new 
mode of profitably employing capital, raises the rate of 
interest by creating an increased demand for capital. 

The rate of interest at any particular time or place, is 
not of itself an indication of the prosperity or of the de- 
cline of a country. The indication is to be sought for, not 



INTEREST AS AN" INDEX OF PROSPEKITY. 229 

in the rate of interest, but in the cmise by which that rate 
is affected. 

1. Whenever the rate of interest is raised by increase of 
risk, this is an indication of adversity. Eise of interest 
from such a source benefits no one. It is of no service to 
the lender, because he derives no profit from that part of 
the premium which insures him against loss. It is as prof- 
itable for him to loan for five per cent without risk, as to 
loan for ten per cent, when five per cent is for risk, and 
five per cent for use. It is- an injury to the borrower, 
because one hundred dollars are worth no more to him 
when he pays five per cent for risk, than when he 
pays nothing for it. Whatever therefore, is paid for risk, 
is always a loss to both parties, and the more there is 
thus paid, the worse it is for both. Hence, the rise of in- 
terest caused by bad government, civil commotion, revo- 
lutions, wars and general immorality, is always an indica- 
tion of national decline, and the fall of interest produced 
by the contrary causes^is an indication of national pros- 
perity, 

2. On the other hand the temporary rise of interest 
caused by increased productiveness and the development of 
new national resources, is an indication of national pros- 
perity. It shows that more than ordinary valuable modes 
of employing capital have been discovered, and that men 
can afford to pay a larger price for the use of capital. 
This is however a temporary rise, because a rise from such 
a cause will soon equalize itself. Increased productiveness 

"will soon supply capital, or it will be imported from less 
favored countries. Tims, in new countries the rate of in- 
terest is high, but this is by no means an indication of ad- 
versity, for such countries, while paying so high a rate for 
capital, yet grow rich faster than those from which they 
borrow. 

3. The gradual fall of the rate of interest caused by 



230 DISTKIBUTION'. 

the diminution of risk, OMdi the greater abundance of capi- 
tal, is an evidence of prosperity. It shows that a larger 
proportion of the means of subsistence is falling to the 
share of every individual ; that every man can more easily 
procure capital ; and that every man in order to support 
himself, produces a larger amount than formerly, of what- 
ever will contribute to the comfort and convenience of his 
neighbor. 

4. On the other hand, the fall of the rate of interest, 
caused by a suspetision of the means of production, is an 
evidence of national adversity. Suppose a war to occur 
between this country and France. The capital now em- 
ployed in transportation, must be almost wholly unproduc- 
tive. The capital employed in producing our exports to 
that country, must also be useless. Hence, the rate of 
interest would fall ; for many men would have no business 
in which to employ their capital. The case would be the 
same, were a fall in the price of capital to proceed from 
civil commotion, or any similar cause. And the adversity 
would remain until the cause were removed. For if capi- 
tal were removed out of the country until, from reduction 
in the supply, the rate of interest rose, the industry of the 
country would still be depressed, until, by peace, order and 
good government, it regained its natural advantages. In 
case of war, the production of articles used in war is greatly 
stimulated, and business generally is for a time quickened 
to unwonted activity. But soon after peace is restored, 
there comes a reaction when the normal and adverse effect 
of the disturbance appears. 

Hence, we see that in order to form any correct opin- 
ion respecting the condition of the country from the pres- 
ent rate of interest, we must always seek for the causes of 
that rate, instead of deciding from the mere rate itself. 

Usury Iia'ws. — In former times, when money was 



USURY LAWS. 231 

borrowed chiefly to be spent in immediate consumption, 
to take interest seemed to imply taking advantage of men's 
necessities, and the business of money-lending came into 
bad repute. The ban of society was upon those who en- 
gaged in it, and they were driven to demand exorbitant 
rates as an offset to the odium under which they lived. 
This prompted the enactment of laws to restrict and regu- 
late interest, which were commonly called usury-laws. 

The old Eoman laws against insolvent debtors were ex- 
tremely severe. To escape their penalty, men consented 
to pay what the lenders were disposed to exact, exorbitant 
interest. There was therefore a kind of necessity that the 
borrower should be protected by laws limiting the rate of 
interest that might be demanded. 

In the middle ages, restriction rather than freedom was 
the rule in all departments and in all relations of productive 
industry. Interest therefore, like everything else, was 
subjected to limitation by law. 

At the present day, the necessary cooperation of labor 
and capital in the development of trade, is better understood. 
The advantage to borrower as well as lender, of loans made 
to be employed in active, profitable business is also appar- 
ent to all, yet the old prejudice still lingers and perpetuates 
in the statute-books of most states, usury-laws. The spe- 
cific object of such laws is to define a certain rate as the 
Mgliest rate of interest permissible. Such laws are in 
direct conflict with the first principles of sound political 
economy, as several considerations clearly show. 

1. They violate the right of property. A man has the 
same right to the market price of his capital in money, as 
he has to the market price of his house, his horse, his ship, 
or any other of his possessions. 

2. The real price of capital cannot ie fixed hy law, any 
more than the real price of flour, or iron, or any other 
commodity. There is, therefore, no more reason for as- 



232 DISTEIBUTION". 

signing to it a fixed value, than there is for assigning a 
fixed vahie to any other commodity. 

3. The price of capital or money is really more variable 
than that of any other commodity. Most other commodi- 
ties have but one source of varia.tion, namely, use or profit. 
But capital in the form of money is liable to two sources 
of variation, rish and use. These vary at different times, 
in different investments, and with different individuals. 
There is, therefore, less reason why the price of money 
should be fixed by law, than why the price of anything 
else should be so fixed. 

4. These laws, instead of preventing, give rise to great 
and disastrous fluctuations in the price of m-oney. 

Suppose that to-day, money is worth in the ordinary 
operations of business, ten per cent, and it is worth six per 
cent in loan . A man will as soon loan as employ it in 
business, if he possesses more than he wishes to use. 
There will then be a fair supply of money in the market. 
But let the profits of capital rise, so that, in the ordinary 
operations of business, capital is worth twenty per cent. 
If now the rate of interest rose with this increased rate of 
profit, the same individuals would be as willing to loan as 
before, and thus, the supply following the demand, there 
would arise no peculiar scarcity. The high rate of inter- 
est would also attract capital from abroad, and thus in a 
very short time, it would in this particular place, be 
brought to the general level. 

But suppose that six per cent were the highest legal 
rate of interest, and that he who loaned at a higher rate, 
was liable to lose both his principal and interest, and also 
his mercantile character. In this case, as soon as the 
profit of capital in business rose to fifteen or twenty i^er 
cent, no one who could thus employ it, would loan it at 
six per cent. Hence, the supply would be immediately 
diminished ; and this would of course, cause a greater rise 



USUEY LAWS. 233 

of interest. Those who from honor or "conscience obeyed 
the laws, would withdraw from the market, and employ 
their capital in some other way, and no one would loan 
but those who were willing to risk the consequences of 
detection. These, having the money market in their own 
hands, will of course charge for the use and for the risk of 
detection, and hence, the price in a few days may become 
doubled or trebled. At the same time, although the real 
value of money may be fifteen or twenty per cent, yet be- 
cause the legal price is six per cent, there is no inducement 
for capital to come in from abroad, to supply the demand. 
Hence, the change in the money market has, by reason of 
this law, no tendency whatever to regulate itself. 

5. Such laios can never he enforced. Men in want of 
money will pay what they please for it, and those who 
choose to pay enough for it can generally borrow. The 
effect then of the usury laws is merely to drive the best and 
most conscientious lenders out of the market, or else oblige 
them to lend by means of subordinate and less scrupulous 
agents. For this agency the borrower must pay, and hence 
the additional rate of interest. To this it is objected that 
money is not like other things, inasmuch as it is a neces- 
sary of life to the merchant, and therefore society must 
step in to deliver him from the effects of extortion. We 
may answer : 

1. It is manifest that this interference does not render 
the merchant's condition the better, but rather the worse. 
Though the assistance, therefore, be well intended, he may 
very yell dispense with it. 

2. The greater the necessity for money, the more 
urgent is the necessity of leaving it undisturbed by legisla- 
tive interference. It makes small difference to the com- 
munity whether the price of jewelry be fixed by law or not. 
But suppose that Avhen flour would bring ten dollars a 
barrel, the government forbade it to be sold for more than 



234 DISTEIBUTIOIT. 

seven dollars. Who does not see that the flour would be 
all driven away and the people starved ? The same prin- 
ciple applies to the rate of interest. In all active commer- 
cial centres, this is now understood and acknowledged. 
The old prejudice is most cherished among the farmers. 

Every state should have a simple enactment of law de- 
fining a legal rate of interest applicable to cases where the 
contract indicates no specific rate, or where, without formal 
contract, a debt has been incurred and interest is due. 
Such a law tends to prevent -disputes and is of advantage 
to both parties. Legislation which attempts to go beyond 
this is wrong and mischievous. 

Usury-laws offer a premium for the defiance of law, and 
confer a monopoly on unscrupulous extortioners. The 
reasons urged for their enactment apply to all other 
things with equal force, and would require the prices of 
all commodities to be arbitrarily fixed by law, and this 
would be as absurd as to try by legislation to regulate the 
tides of the ocean. Legal sanction and security for all 
reasonable contracts in loaning capital, encourage free 
competition and constitute the surest safeguard against 
excessive interest. The abrogation of usury-laws in Great 
Britain and in Massachusetts and other American states, 
may be welcomed as first steps in a reform, destined, we 
hope, soon to be universal. 

Dividends. Tliis term is used to denote the remune- 
ration of capital invested in Stock-companies. This form 
of compensation for the use of capital is marked by some 
peculiarities which deserve a special notice. 

Stock-companies are designed to unite contributions of 
capital from a number of persons, for business operations 
on a scale too large for the means of an individual capital- 
ist. Such organizations are formed chiefly for manufac- 
turing in large establishments, for banking, for insurance. 



DIVIDENDS. 235 

for the construction and management of railways, canals, 
and the telegraph, for express transportation, for working 
mines and for extended navigation. In forming a company, 
the enterprise is projected, an estimate is made of the 
amount of capital required, and this is divided into equal por- 
tions called shares, which are offered more or less freely to 
the public. Most commonly the shares are one hundred 
dollars each. Whoever purchases one or more shares 
receives for his money a certificate of ownership which 
constitutes him a member of the company, entitled to a 
vote in the election of directors and to a participation in 
the proceeds of the business, in proportion to the number 
of shares standing in his name. These shares are trans- 
ferable under certain regulations of each company and can 
be sold, like any other property, at their market-value. 
The owner for the time being is the stock-holder and rec- 
ognized member of the company. Ordinarily, a board of 
directors is annually elected by the stock-holders, and the , 
oversight of the business is entrusted to them. They ap- 
point a manager and other salaried officers, who attend to 
details and are accountable to the directors. 

Quarterly or semi-annually, the accounts are balanced, 
an inventory is made and the profits of the business, after 
providing for all expenses, are ascertained. On the basis 
of that showing, dividends are declared, setting down a cer- 
tain percentage to each share of the stock. In all well- 
managed companies, before the declaration of dividends, 
there is set aside from the profits a small reserve to meet 
emergencies. This reserve accumulates from year to year, 
adding steadily to the real value of the stock. Sometimes 
this reserve or a portion of it, is divided among the stock- 
holders by an extra cash dividend. Sometimes it is ap- 
propriated to the purchase of new buildings and new 
machinery for the expansion of the business. In this case, 
these outlays are regarded as increasing the capital and a 



236 DISTRIBUTION. 

stoch- dividend is made, that is, eacli share-holder receives 
an addition to his stock proportioned to the number of his 
shares. Thenceforward, the profits are divided pro rata, 
to the "whole amount of stock thus increased. 

For illustration of the whole matter, suppose A. B. took 
fifty shares of the stock of the Pacific Mills Manufacturing 
Company, on which he has received returns for ten years. 
These shares represented five thousand dollars of capital 
originally invested in this way. Eegular semi-annual cash 
dividends of five per cent, that is ten per cent per annum, 
have been made. Three years after the company was 
formed, a stock-dividend of twenty per cent was declared, 
and three years later another stock-dividend of the same 
amount was made. The company has still a considerable 
reserve in which every stock-holder has an interest. In 
view of this reserve, the large profits, and the high char- 
acter of the managers, this stock when offered for sale, 
commands a premium of forty per cent, that is, for 
every share of stock rated at one hundred dollars, purchas- 
ers are willing to pay one hundred and forty dollars. On 
these suppositions, A. B.'s remuneration for his capital for 
ten years will stand thus : 

Cash dividend on $5,000 at ten per cent for ten years, $5,000 

" " " 1,000 " "■ " seven " 700 

" " " 1,200 " " " four " 480 

First stock-dividend, 20 per cent on original stock 1,000 

Second " " 20 per cent " increased" 1,200 

Premium of present market value, 40 per cent on $7,200 2,880 

Total $11,260 

This is equal to an average of nearly twenty-three per 
cent for the whole period. All of this may be set down as 
earned by the original capital thus invested. Meantime 
the ordinary rate of interest in N"ew England where the 
mill is situated, has been not more than seven per cent. 
Simple interest on the original five thousand for ten years. 



DIVIDENDS. 23? 

■would have amounted to three thousand five hundred. 
The difference between this amount and the sum given 
above is seven thousand seven hundred and sixty, which is 
therefore profits, the surplus over the ordinary remunera- 
tion of capital. 

We have thus brought to view the chief pecnliarity of 
this form of returns for capital. Properly considered. 
Dividends include two elements, interest and profits. If 
instead of bnying stock, A. B. had loaned his money to 
the manufacturing company, he would have received only 
interest. But as an owner of stock, he becomes a direct 
partner in the business, entitled to a share in the profits, 
liable also to share in its losses. The case we have sup- 
posed is a favorable one, yet by no means extraordinary. 
It must be remembered however, that many investments 
of this kind yield no dividends, or such as amount to less 
than ordinary interest. In some cases, the capital is lost 
entirely ; and in certain corj:) orations, such as our national 
banks, each stock-holder is by law, made liable not only to 
lose his stock, but to pay an additional amount equal to 
that of his stock, if necessary, toward liquidating the debts 
of the company. There are besides, continual fluctuations 
in the market-value of many stocks, caused by gambling 
operations of brokers and adventurous speculators, — the 
bulls and bears of Wall Street. Often, as seen in some 
railway companies, the managers sacrifice the interests of 
the corporation, for the sake of making a fortune for 
themselves through fluctuations in the price of stocks, 
caused by their own action, and of which they know best 
how to take advantage. In other instances, as appears in 
some insurance companies, the officers and managers, hold- 
ing a majority of the shares, vote to themselves salaries 
which use up a large portion of the profits. Frequent 
frauds and defalcations also appear, through abuse of trusts 
in managing business with funds belonging to a common 



238 DISTRIBUTION". 

stock. Men of highest character for integrity, have fallen 
under the delusive snares, the temptationSj subtle and 
strong, which beset these positions. And by wild and 
utterly baseless schemes of fradulent organizations, many 
simple ones are induced to embark their carefully saved 
capital on an open sea, in paper boats, through which it 
soon sinks to the bottom never to be recovered. Capital 
invested in this form, is subject more or less to these risks. 
The interests of the small stock-holder are in other hands 
than his own, subject often to the will of men of cold mer- 
ciless selfishness. A careful estimate of the results of such 
investments, would probably show average returns much 
less than ordinary interest. Yet, shrewd foresight in the 
careful selection of stocks may secure a tolerable certainty 
of dividends, which will yield, besides ordinary interest, a 
considerable profit. The danger is always that, under an 
illusion of the imagination excited by occasional singular 
examples of success in these operations, the risks will be 
overlooked, sanguine expectations will be raised, and men 
will find too late, to their loss and grief, how treacherous 
are the seas to which capital in such investments are 
exposed. 



CHAPTER XVII. 

DISTEIBUTION OF PEOFITS. 

Profit is a term popularly used in a broad sense, to 
denote any benefit proceeding from any kind of exertion, 
as we speak of the profit of study, of physical exercise, of 
social intercourse, etc. As a technical term of political 
economy representing the proceeds of industry, it is em- 
ployed with too much looseness and ambiguity. Most 
writers define profits to be " the remuneration paid for the 
use of capital," making the term include interest and 
something more. At the same time, they say that in esti- 
mating the cost of any product, interest at the current 
rate on the capital employed, should be reckoned in. Thus 
gross proceeds are confused with net proceeds under the 
same term. Mr. J. Stuart Mill says, ** The three parts 
into which profit .may be considered as resolving itself, may 
be described respectively as interest, insurance and wages 
of superintendence." Mr. Amasa Walker makes the mat- 
ter more definite at least, by representing profits as the 
share which falls to the employer or manager, or to use 
the convenient French term " V entrepreneur," who effects 
a union between capital and labor and directs their active 
cooperation. This loose and varied use of an important 
term is certainly not scientific. 

It seems clearer and better to hold this word profits 
strictly to mean the net proceeds, the surplus after the neces- 
sary expenses of business have leen deducted. A consistent 
presentation of our science i*equires just this term and pre- 



240 DISTRIBUTION. 

scribes for it this specific meaning. "We have seen that the 
main factors in the production of wealth are labor and 
capital. We have seen that various kinds of labor are 
necessary, as simple labor, skilled labor, and labor of over- 
sight, superintendence and general management. We 
have seen also that these different kinds of labor are com- 
pensated by different methods and at different rates. 
Those engaged in direct, operative labor constitute the 
great majority of laborers and receive their remuneration 
in ivages j those who have the responsible charge of over- 
sight and management are compensated by salaries, fixed 
according to the estimated importance of their service ; 
and the proper remuneration of capital is interest. All 
these outlays are to be reckoned as expenses, and with 
them are to be included the two other items, insurance, or 
what is paid to guard against certain risks, and tQ,xes paid 
for protection by the government. Now, if the products 
of an industrial establishment, after keeping the capital 
good, provide for these expenses and nothing more, the 
business is just sustaining itself, but it yields no profits. 
In that case, since all parties get their legitimate compen- 
sation, they may be satisfied to run on so for years. 
Whatever is realized beyond this, is profit. If the pro- 
ceeds come sliort of providing for these expenses, some of 
the parties must suffer loss. 

When the proceeds just cover the expenses named, 
while the business as a whole yields no profit, each of the 
several parties concerned may be earning for himself an 
individual profit. The laborer, out of his wages at forty 
dollars per month, may support himself on thirty-five, and 
have for the year a profit of sixty dollars, deposited in the 
savings-bank. The foreman from his salary of one thou- 
sand dollars per year, may lay Jiway in like manner, two 
hundred as his profit. The manager, with his salary of 
ten thousand dollars a year, may,- if he chooses, spend all 



PROFITS. 241 

in luxurious living, or by a little self-denial, he may add 
one half the amount, his profit, to his accumulating wealth. 
And the capitalist receiving seven per cent on his fifty 
thousand invested, may turn a portion, more or less, of 
this interest to increase his capital and reckon so much as 
his profit. In this view of the matter, each individual is 
regarded with reference to the personal end for which he 
employs his labor or his means, that is, to secure a living, 
and if possible, a surplus beyond. This use of the term is 
not at variance with our technical definition. But in our 
science, the word is more especially employed in its broader 
application to the proceeds of industry in which capital 
and labor are united. 

The principle is the same lohen one comlines in himself 
the functions of operative, manager and capitalist ; only in 
such a case, wages, salary, interest and profits if there be 
any, all come to him. Even then, the profits of his busi- 
ness can be distinctly defined, only by setting down a por- 
tion of the gross proceeds as wages for his labor, another 
portion as reward for management, another as interest for 
his capital and something for taxes and insurance. The 
net proceeds, after deducting these, would be the profits 
of his business, and in this surplus, if anywhere, he will 
find the main advantage of conducting an independent 
business, instead of loaning his capital and engaging his 
labor and skill in the service of others. 

This rule is especially to be applied in all the complica- 
ted arrangements of productive industry, where different 
parties representing different interests are united. In all 
these combinations, the great aim is to make a profit and to 
mahe it as large as possible. It is evident that profits can 
be legitimately increased only by reducing expenses, or by 
increasing the amount and the value of the products. The 
amount of profits will be varied by whatever affects favora- 
bly or unfavorably either the efficiency and fruitfulness of 
11 



242 DISTEIEUTION'. 

the industry, or the expense of carrying it on. Hence, the 
importance of wise and faithful management. This is the 
most important service and deserves the highest compensa- 
tion. But this fact does not warrant the appropriation of 
the entire profits to " the entrepreneur." 

In this connection, another common error must be 
noticed. It is that of expressing the measure of profits in 
a business, hy a percentage on the capital invested. If the 
profits belong exclusively to the capital, there may be some 
propriety in this usage. But at best, it is an indefinite, 
almost unmeaning way of stating the matter. In many 
cases, tlie labor is of more account than the capital. A 
laborer may, as we have seen, gain a profit from his indus- 
try without any capital of his own. A shoemaker with a 
capital of five hundred dollars, may by untiring industry, 
make his proceeds count a hundred per cent on that 
amount and yet receive no sufficient return for his labor ; 
his business yields no profits at all. A return of twenty 
per cent on five hundred thousand dollars, invested in a 
business done on a large scale, may furnish ample remune- 
ration for labor and management, with a large margin for 
profits.- Hence, often, a man will find it for his advantage 
to work for wages or a salary in connection with a large 
establishment, rather than to attempt an independent busi- 
ness. So with truth is it said, ''It is in the nature of 
trad-e and manufacture that great capital drives small capi- 
tal qid of the field ; it can work for smaller returns." 

With this understanding of the nature of profits and 
the manifest. fcicts that industry is carried on with a view 
to profits, and that successful busjness actually yields prof- 
its, we come to the question, Hoio the profits are to le dis- 
tributed. Most writers, from Adam Smith to J. S. Mill, 
have treated profits as the remuneration of capital, and 
therefore to be assigned wholly to the owners of capital. 



CAPITAL MAT NOT CLAIM ALL THE PROFITS. 243 

When the owner of the capital or a large portion of it, is 
also manager of the business, the power is in his hands, 
and generally he will use it for his own advantage. This 
is most frequently the case, and hence, as a matter of fact, 
the capitalists do quite commonly get the whole benefit of 
the profits. But our common sense of right cannot be 
satisfied with such a distribution. The usage may be tol- 
erated, but the calm sober judgment of men pronounces it 
not equitable. There is in it an element of tyranny which 
laborers feel and groan under and complain of, not with- 
out reason. Take an illustration from agricultui'al indus- 
try in England, where capital, in the form of land, is made 
by law, a monopoly, enjoyed by few. The case comes 
before us stated hypothetically, but it finds many a coun- 
terpart in fact. Lord Dundreary, sole proprietor of ten 
thousand acres, rents his lands to forty tenant-farmers, each 
having two hundred and fifty acres, at thirty dollars per 
acre. These farmers, furnishing skill, executive ability 
and some capital in the form of tools, live-stock, etc., 
make half as much per acre, as the rent they pay. They 
employ four hundred laborers — ten for eacli farm, on 
wages at about four dollars per week. Then, we have the 
following footing : 

One capitalist receives in rent : $300,000 

Forty farmers get for their returns ($3,750 each) 150,000 

Four hundred laborers receive in wages ($200 each per year) 80,000 

Total proceeds of the estate $530,000 

Four hundred and forty-one liien, representing 
probably as many families, are drawing on the pro- 
ducts of the ten thousand acres. A single one, my lord, 
the chief capitalist, takes for himself more than half 
the entire proceeds, ahsorhing all the profits. Forty 
farmers receive a fair compensation for their capital, skill 
and care in managing the business. Four hundred labor- 
ers, reduced to tlie lowest state of penury and degradation. 



244 DISTRIBUTION. 

hardly keep soul and body together. In view of such 
facts, we do not wonder that an intelligent farm-laborer, 
Joseph Arch, should rise in his place and move for some 
radical reform and relief ; or, if we may credit the news- 
paper report of his speech, that Mr. Gladstone should say 
of the British land-laws, " I am in favor of rather bold and 
important, if not sweeping change. Greater freedom 
ought to be established, and I think that not merely eco- 
nomical but social mischief results from the present system. 
Therefore, I am prepared to entertain on that subject, a 
great change." 

In our country, since slavery ceased, so extreme wrong 
could not probably exist in the department of agricultural 
industry, nor perhaps in any other branch of business. 
But the principle that profits are the reward of capital, 
exclusively, involves such a wrong in greater or less degree. 
Probably, the detailed statement of the disposition actually 
made of the proceeds of many of our large manvifacturing 
establishments and railway operations, would reveal like 
inequalities, against which the common mind instinctively 
protests. It is urged on the other side, that while capital, 
by having all the profits may receive more than its share 
one year, yet the very next year or for a series of years, it 
may receive no reward at all ; that all the labor is first paid 
for, before capital receives any of its pay ; and that in times 
of depression, while labor may be forced to take less pay, 
capital may get nothing and yet it can not be withdrawn. 
All this is true ; and because capital thus takes the chief 
burden of risk, it may justly claim a proportionately larger 
share of the profits. But equity and good feeling and the 
best interests of all concerned will be promoted by holding 
to the distinction we contend for and recognizing labor as 
also a rightful partner to some extent, in both the risks 
and the profits. 

The rule which assigns the entire profits to the manager 



CO-OPERATIVE ASSOCIATIONS. 245 

or employer, seems no less objectionable. The importance 
of his jiidgment, tact and energy to the success of the busi- 
ness is obvious, and it is readily admitted that his remune- 
ration is rightfully made larger than allowed to any other 
of the parties, and that its amount may probably be made 
to depend on the actual profits. This consideration, how- 
ever, hardly Justifies the appropriation of all the profits to 
his benefit. The laborers and the capitalists between 
whom he stands, the middle-man, agent of both, may justly 
clttim a share. 

Cooperative Associations have been formed to secure a 
more equitable distribution of profits, in the interest espe- 
cially of workmen. In these associations, a number of 
working-men of a particular branch of industry join their 
means and their hands to carry on business for them- 
selves, expecting to divide the entire proceeds among 
themselves by some defined rule of equity. Some such 
organizations have been, for a time, partially successful, 
but they are pretty sure to end in failure at last. The 
reasons are obvious. It is not easy to rule out jealousies 
and harmonize the views of such a company. A greater 
obstacle to success is found in the lack of capital and man- 
aging ability, two essentials for the continued life and 
prosperity of any enterprise amid the sharp competitions 
of the business-world. A military campaign cannot be 
successfully conducted by the direction of a majority vote 
in mass meeting. It must have an able leader, trained to 
command. So, in business, especially where numbers are 
to be engaged together, "a Captain of Industry" is all 
essential. Such a man, not every association of a hundred 
artisans however skilled and eflBcient, can furnish. Mr. 
F. A. Walker says that the sole object of this form of or- 
ganized cooperation is to get rid of "'the entrepeneur," and 
divide his proper remuneration. This means only that the 
laborers are trying to appropriate all the profits to them- 



246 DISTKIBUTION". 

t 

selves, which involves essentially the same mistake as ap- 
peared in the other cases. 

Fo7- a fair distriMdion of Profits, there must be a full 
recognition of that Partnership which our science presents 
as an elementary principle of productive industry. Re- 
solving this partnership by functions, there are three mem- 
bers, the Capital, the Executive capacity, and the Labor. 
Each is entitled to a share in the fruits of their coopera- 
tion. We may not say an equal share ; because, in every 
case, as we have seen, capital takes the greater risk and is 
liable to the heaviest losses, and it is fair that this chance 
of greater loss should be balanced by a chance of greater gain. 
So, too, in every case, the amount of profits is due most of 
all to the executive wisdom and energy of the manager, 
and he is entitled to a proportionately larger share in the 
returns. After due allowance for these, however, there is 
a share which justly belongs to the labor, and should be 
distributed among those who make up this third member 
of the firm, according to each one's merit and grade in the 
service rendered. 

It is a hopeful sign that public attention is now turning 
earnestly to consider plans for admitting workmen to a 
participation in the profits of manufactures. Some inter- 
esting and successful experiments have been tried. We 
adduce in illustration of the method, the case of the 
Messrs. Brewsters, carriage manufacturers of New York : 

' ' The firm offered to divide ten per cent of their net profits 
among their employes, in proportion to the wages severally earned 
by them, no charge to be made by the members of the firm for 
their services, prior to the deduction of ten per cent, or for inter- 
est on the capital invested ; the business of each year to stand by 
itself and be independent of that of any other year. For some time, 
the plan worked to the satisfaction' of all parties, as high as 
eleven thousand dollars a year being divided among the hands. 
The scheme was broken up only when, through strong pressure 



WOEKMEN PARTNERS IN PROFITS. 247 

from outside and the general excitement of the hour, the workmen 
were carried into the great strike of the trades in New York." 

There are obstacles in the way of the immediate, gen- 
eral adoption of this measure. False ideas on the part of 
both workmen and their employers must be corrected, 
mutual confidence must be established and common usage 
must be changed ; things which cannot be accomplished 
in a day. Yet what has been done fully justifies the state- 
ments of Mr. F. A. Walker. 

"That something of the sort is practicable, with the exercise 
of no more of patience, pains and mutual good faith than it is 
reasonable to expect of many employers and many bodies of work- 
men, I am greatly disposed to believe. Many experiments and 
probably much disappointment and some failures will be required 
to develop the possibilities of this scheme and determine its best 
working shape, yet in the end, I see no reason to doubt that such 
a relation will be introduced extensively, with the most beneficial 
results." 

Success in these movements will involve as both cause 
and effect, a better understanding of the mutual relations 
of the parties and of the nature of profits on the part of 
capitalists and managers, broader views of individual inter- 
ests as inwoven with the common interests, and on the 
part of workmen, more intelligence, more tlirift, and con- 
sequently more of genuine manhood. Abiding relief for 
the unnatural and ruinous antagonism of labor and capital 
and a satisfactory solution of the hard problem of economi- 
cal science respecting the practical relations of these two 
factors in production, are to be found in the adoption of 
measures which aim to establish an equitable distribution, 
of profits. 



CHAPTER XVIII. 

REVENUES OF THE GOVEENMENT, 

A Problem of Political Economy. — The prosper- 
ous industry through which men acquire wealth and the 
well-ordered condition of society by which men are made 
secure in the possession and enjoyment of wealth, depend 
on good government, eflBciently administered. Every indi- 
vidual of the state has therefore an interest with regard to 
his own well-being in the maintenance of government. As 
a compensation for the service rendered hira, he may then 
properly be called on to contribute a portion of his wealth 
for its support. These considerations bring this topic 
necessarily within 'the scope of our science ; and it comes 
under this division which treats of Distribution, because 
the public revenues must obviously be drawn from the pro- 
ceeds of a people's industry. Furthermore, since the gov- 
ernment represents a common public interest superior to 
any private interest, its claim very properly takes precedence 
of all others ; in a sense, it has a first lien on the entire 
toealth of the nation. 

Taxation is the means employed to gather from, a 
people the revenues of its government. To devise and 
apply an equitable system of taxation is one of the pro- 
foundest problems of legislation. It is a problem which 
the true statesman will study in the light of political econ- 
omy. In studying the problem, taxation should be regarded 
with respect simply to its one object, viz., the raising of a 



TAXATIOIJ^. 349 

revenue for the state. In despotic governments, the will 
of the ruler determines arbitrarily both the methods and 
the measure of taxation. The people's wealth is conse- 
quently exposed to the unrestricted plunder of an army of 
tax-gatherers, and great inequality and oppression prevail. 
It is a fundamental principle of free and just government 
that taxes shall be imposed hy representatives of the people 
alone, through proportional and reasonable assessments on 
all estates ; and that they shall be collected by uniform and 
responsible agencies acting under defined powers and direct 
accountability. The one thing to be aimed at is to make 
the burdens laid on the people as light and equable as pos- 
sible consistently with providing means ample for the 
support of the government. For this, two things are 
essential, first, fair and impartial assessments, and second, 
efiicient and economical collection. A perfect result has 
never yet been attained, for human selfishness opposes 
many subtle and great obstacles ; but much is gained by 
steady contemplation of the philosophical ideal. < 

Adam Smith's Maxims. — This father of modern 
political economy laid down four rules of equitable taxa- 
•tion, as follows : 

1. ' •' The subjects of every state ought to contribute toward 
the support of the government, as nearly as possible, in 
projjortion to their respective abilities ; that is, in propor- 
tion to the revenue tvhich they respectively enjoy under the 
protection of the state. 

2. The tax luhich each individual is bound to pay ought 
to be certain and not arbitrary. The tim,e of payment, the 
manner of payment, the quantity to be paid ought all to be 
clear and plain to the contributor and to every other person. 

3. Every tax ought to be levied at the time and in the 
manner in which it is most lihely to be convenient for the 
xiontributor to pay it. 

11* 



250 DISTRIBUTION". 

4. Every, tax ought to he so contrived as hotli to take out 
and to Iceep out of the poclcets Of the people as Utile as possi- 
ble over a?id above ivhat it hri7igs into the public treasury 
of the state.'''' 

It may be questioned whether it is true, as seems to be 
implied in the first maxim, that the abilities of different 
persons are measured in due proportion by their respective 
revenues or incomes. It is obvious that the ability of one 
whose annual income is five hundred dollars, and that of 
another whose income is fifty thousand dollars, to pay a 
tax of two per cent on their respective revenues, are not 
equal. Hence, the need of some further discrimination in 
estimating abilities. With this exception, these maxims 
of Mr. Smith are believed to embody principles of equity. 
They have met with general approval, as furnishing a test 
to which various schemes of taxation may be referred. 

Direct and Indirect Taxation. — These terms are 
' defined by Mr. Mill thus : " A direct tax is one which is 
demanded from the very persons who, it is intended or de- 
sired should pay it. Indirect taxes are those which are 
demanded from one person, in the expectation and inten- 
tion that he shall indemnify himself at the expense of 
another." A poll-tax, a tax on land, live-stock, tools, 
goods, etc., and strictly speaking, an income tax, are 
examples of direct taxes. Duties laid on imported goods 
and excises on articles of home-manufacture are exam- 
ples of indirect taxation ; the importer or manufacturer 
who pays the tax, adding the amount of the tax to the 
price of the goods, to be ultimately paid by the consumers. 
Direct taxation, with fair assessments and honest returns 
of property and income, may be most fully conformed to 
the equitable principles embodied in the maxims just 
stated. But if applied to all kinds of property, it involves 
much labor and expense in collection, and is apt to prompt 



DIRECT A2JfD INDIEECT TAXATIOIT, 251 

concealment and evasion and to provoke dissatisfaction 
and complaint on the part of tux-pjiyers, because they 
know precisely when and how much they have to pay and. 
feel the full force of the burden. Indii'ect taxes, on the 
other hand, are more cheerfully submitted to and more 
easily collected, because laid on the goods at the port of 
entry or at the manufactory, and so distributed in small 
quotas through the increased prices, that no one thinks of 
the tax he pays, when he makes his purchases. But this 
method violates nearly all of Mr. Smith's maxims. Under 
it, the burden is imposed very unequally, each one's pro- 
portion being determined not at all by his ability but by 
his necessities. Often a poor man, with a large family to 
provide for, actually contributes more for the support of 
the government, than his neighbor with ten times his 
wealth and ability. It is only a partial relief to this in- 
equality which is gained by a discrimination that lays 
heavier duties and excises on luxuries than on the neces- 
saries of life ; for J;he proportion which each bears of the 
burden is still determined not by his ability, but by what 
he consumes. Hence, direct taxes if equally imposed, are 
commonly more just ; that is, they derive the support of 
government from individuals more in proportion to their 
respective abilities, and to the degree of benefit which each 
derives from the government. 

In favor of direct taxation, it may also be added that 
it is decidedly more in harmony with the genius of a 
republican or representative government. Such a govern- 
ment proceeds upon the principle that the people are the 
fountain of power, and are competent to govern them- 
selves. Now, such a government ought not surely to act 
upon the directly opposite principle, that the people may 
?iot knoiv what they pay, or when or how they pay. They 
are the party from which especially, nothing of this sort 
should be concealed. They should know lohat and hoio 



252 DISTKIBUTION". 

rmich they contribute ; and also in what manner whatever 
they contribute is expended. It is in this knowledge and 
in the judicious use of it, that their safety consists. 
Therefore the consideration so frequently urged in favor 
of indirect taxation, that the people do not feel it, is one 
of the strongest arguments against it. The more a people 
feel taxation, and the more jealously they watch over the 
public expenditure, the better it is for them and for their 
rulers. Yet, until there is attained a higher standard of 
intelligence, honesty and patriotism than has been reached 
by any people hitherto, governments will still be compelled 
to employ this more convenient and easy.method of rais- 
ing their revenues. 

In most countries it is now adopted as a rule of indi- 
rect taxation that those commodities, such as intoxicating 
liquors, the consumption of which is regarded as injurious, 
shall he most heavily taxed. Experience has shown that 
the consumption of such articles is not materially dimin- 
ished by the tax. As a check on immorality, the measure 
is therefore of little avail ; but as a source of revenue, it 
is found to yield large results. Tlie greater part of the 
revenue of the Britisli government from customs, is de- 
rived from duties on tobacco and intoxicating liquors. 
When however, the duty or excise is so high as to raise 
the price of the article very much above the cost of pro- 
duction, the temptation to smuggling and illicit manu- 
facture is very strong, the expense of maintaining the law 
and collecting the tax is immensely increased, and corrup- 
tion, more or less, on the part of revenue officers is almost 
inevitable. This folly was sadly illustrated, when the 
United States government laid a tax of two dollars per 
gallon on distilled spirits which could be manufactured for 
twenty cents a gallon. The revenues from this source, 
instead of being increased, were greatly reduced by this 
over-taxation, the price of the article in the market was 



TAKIFFS. 253 

steadily less than the amount of the tax, and all over the 
country, revenue officers were corrupted, the members of 
*' whisky-rings " made enormous gains, under cover of the 
law which they evaded and defied, and the public senti- 
ment was generally demoralized. 

Tariffs. — This term signifies strictly the lists of im- 
ported articles which are subject to tax, with the duties 
laid on each. The word is quite commonly used to em- 
brace also the legislative action on the subject. Protective 
tariffs so-called, designed to encourage certain kinds of 
home manufactures will be considered in another place. 
The topic is here to be noticed only as a revenue measure, 
one form of indirect taxation. The duties on all articles 
included in the tariff are paid by the importer, at the port 
of entry, before he can take possession of his goods. 

Duties are imposed in two forms, specific and ad-vdlorem.. 
8]}ecific duties are certain sums charged on articles, by the 
piece, the pound, the yard, the gallon, etc., without refer- 
ence to the value. Ad-valorem duties are indicated by a 
defined percentage of the value of each class of goods, as 
named in the importer's invoice. Each of these forms has 
its advantage and its difficulties. Specific duties are sim- 
ple and clear. The collector needs to know only the 
quantity of the goods, and easily reckons the duty to be 
paid. But the tax in this case is very unequal. Suppose 
the duty laid on tea to be ten cents per pound. The tea 
which the poor consume, costs thirty cents a pound ; the 
better quality used by the rich costs a dollar or more. 
This involves a tax in the one case, of thirty-three and 
.one-third per cent, and in the other of only ten per cent. 
Ad-valorem duties lay the taxes more equally, but involve 
more difficulty in the collection, since the value as well as 
the quality of the goods must be ascertained. H«nce a 
temptation on the part of the importer to present a false 



254 DISTKIBUTION". 

invoice. To counteract this, the government must employ 
a host of experts to examine and estimate the values of 
goods. These often come into altercations with the im- 
porters, and sometimes refuse to recognize an invoice that 
is honest and true. In American tariffs, sometimes the one 
principle and sometimes the other has prevailed. Some- 
times, as in the tariff now in force, both are combined, 
producing intricate and vexatious complications, and 
greatly enhancing the expense of collections. There can 
be no doubt that on the whole, both for the people and for 
the government, the best tariff is one which lays a specific 
duty, of moderate amount, on a comparatively short list of 
articles, which are not produced at home, and must there- 
fore be imported from abroad. 

American Taxation. — In the United States there 
are two general systems of taxation — that instituted 
hy the National government, and that instituted hy the 
several State governments. The latter includes all local 
taxes imposed under authority of each state by counties, 
cities, toAvns and school-districts. The national constitu- 
tion authorizes Congress to impose taxes in every form, 
subject only to the qualification that direct taxes must be. 
apportioned to the several states according to their respec- 
tive populations, and that all duties, imposts and excises 
shall be uniform throughout the United States. It ex- 
pressly forbids any state to lay any imposts or duties on 
imports or exports, except for executing its inspection 
laws. In consequence of these constitutional provisions, 
the taxes paid by the national government have been 
hitherto, with only slight exceptions, indirect, while the 
state governments rely almost exclusively on direct taxes. 
The two systems thus combine two methods, in a way 
which secures the advantages of each, with as little draw- 
back of disadvantage as is possible. 



NATIONAL TAXATION. 255 

The proceeds of duties on imports proved sufficient to 
meet the needs of the general government, for the most 
part, until the recent war of the Kebellion. To provide 
for the heavy expenses of that war, and for the consequent 
debt, resort was had to four other forms of taxation, which 
deserve a brief notice. 

a. Excises. These are imposts laid by Congress on cer- 
tain specified articles of domestic manufacture. They are 
collected by the sale of stamps to be affixed by the manufac- 
turer or by an officer of government, before the goods are 
thrown upon the market. The amount of the excise is in 
each case added to the price of the article, and thus the 
tax is paid by consumevs. Such a tax must work to the 
disadvantage of home-production, unless corresponding 
duties are imposed on the same articles when imported. 
It involves the inequality which we have seen to be inci- 
dent to all indirect taxes. It also involves great expense 
in collection, since the government must keep agents in 
every part of the country, watching the manufacturing 
establishments and the markets, to guard against evasion 
of the tax. The number of articles thus taxed was quite 
large at first, but now, liquors and tobacco yield the 
greater part of the internal revenue from this source. 

h. Stamps. This is a tax levied by requiring a stamp 
representing a small value, to be attached to various instru- 
ments and forms of business, in order to give them legal 
force. The expense of the postal service is nearly pro- 
vided for by this means, at a very slight charge to the. peo- 
ple. This method is also applied to bank-checks, notes, 
deeds, mortgages, contracts, wills, etc. Such a tax touches 
directly the wealth of the country in transition, and just 
at the points too, where it needs government protection to 
give it a certain kind of security. It comes upon those 
best able to bear the burden. It accords with Mr. Smith's 
fourth maxim, for the cost of collection is very light and 



256 DISTRIBUTION". 

nearly the entire amount taken from the people's pockets 
goes into the government treasury. When first introduced, 
it seems a little vexatious, and it takes time for a people 
to become habituated to it, but once fairly instituted, it is 
hardly felt, and is found an economical and equitable 
mode of distributing the public burdens. Great Britain 
employs it very successfully, raising over fifty millions 
each year from the sale of stamps, to be thus applied. It 
is to be regretted that our government almost entirely 
abandoned this measure, just when it was fairly inaugura- 
ted after the war. 

c. Licenses. This is a form of tax quite akin to that 
last named. It is imposed by requiring men to buy of the 
government, at specified rates, certificates authorizing tliem 
to engage in certain kinds of husiness. It has been em- 
ployed by both the Federal government and by state gov- 
ernments. It is objectionable because it discriminates 
unequally among industrial occupations. It is urged in 
its favor that it draws from certain parties, such as ped- 
dlers, insurance companies outside of the state and some 
professional men, a just return for the advantage they 
derive from the protection of the government, which 
return could not be secured in any other way. The prin- 
ciple as applied to occupations regarded as mischievous, 
such as dram-selling, has another aim than to raise a 
revenue, that is, to restrict an evil. In that application, 
it has to do with the morals of society, as much as with its 
economies. 

d. Income tax. This is a form of direct tax, levied by 
imposing a certain percentage upon the annual incomes of 
individual citizens. According to Mr. Mill's definition, 
this is certainly a direct tax ; although the American Con- 
gress when instituting it, declared it not a direct tax in 
the sense of the term used in the constitution with respect 
to the apportionment of direct taxes among the states. 



INCOME TAX. 257 

Theoretically, this is the most equitable of all taxes, since 
it touches men exactly according to their abilities. But 
as we have seen, if the percentage is uniform for all in- 
comes, it involves an inequality which bears heavily on 
those whose incomes are small. To relieve this, two meas- 
rn'es are employed. The first is to exempt all incomes 
below a specified amount. The other is to establish two 
or three grades of income, and make the percentage 
greater on the larger incomes. ;;i^The chief objection to an A 
income-tax is the difficulty, almost impossibility of ascer- I 
taining men's real incomes ; partly because many keep no / 
accurate accounts, and partly because few, comparatively / 
will make truthful report of their incomes. Inquisitorial j 
measures to discover actual incomes are exceedingly offenv 
sive. Moreover, as in the case of excises, the labor and 
cost of collecting this tax involves a serious drawback on 
the public treasury. Notwithstanding all this, the British 
government has employed this method of taxation for 
forty-five years, with such success that nearly one-sixth of 
the annual revenue of the kingdom is estimated to come 
from this source. The United States collected an income 
tax for ten years, from 1863 to 1872 inclusive. The lar- v 
gest amount raised in any one year, by this means, was 
about sixty-one millions in 1866, from four hundred and 
sixty thousand one hundred and seventy persons assessed. 
/^Actual experience under the law tended to relieve diflicuP 
ties and objections. When most efficiently carried out, 
concealment and dishonesty were i}ot probably greater 
under this form of tax than are practised continually 
under the attempts of the states to levy taxes on miscella- i 
neous personal property. In both cases the needed relief 
must come from the moral culture which forms good coil- j 
sciences. 

State Taxation. — Under state authority, all taxes 



358 DISTRIBUTION. 

are direct, laid upon persons by poll-taxes, upon property 
by assessment and upon certain kinds of busmess by 
licenses. \ The poll-tax is ordinarily a small amount levied 
upon every male citizen who has reached his majority. It 
recognizes the protection which the government extends to 
persons as well as to property. It is made in theory, a 
condition of the electoral franchise ; he who pays the tax 
and votes being regarded as the head of a family, in both 
acts, representing a household. It is found difficult and 
expensive to collect this tax from all, and hence the theory 
is seldom carried out. Some of the states lay no poll-tax. 

Taxes on property are imposed in all states by essen- 
tially the same method. The state authority, by statute, 
requires the election or appointment of assessors in every 
town and city, who make a valuation of all property which 
the law subjects to taxation. Keal estate, and articles open 
to their inspection, such as live-stock, vehicles, etc., are 
estimated by the assessors. Other personal property is 
returned in prepared lists by the owners, who may be 
required to make oath to the completeness and truthful- 
ness of their returns. 

In some states, however, the assessor sets down his es- 
timate of each one's personal property, and if the taxpayer 
thinks the estimate too high, he is permitted " to swear it 
down," as the phrase is, that is, to declare under oath what 
is the true amount of his personal property after deducting 
his indebtedness. 

Real estate is commonly set down at from twenty-five 
to thirty per cent less than its market value. Since as- 
sessors in different places may adopt different standards 
of valuation, the original assessments are in most of the 
states referred to boards of equalization appointed for 
each county, and their judgment is subsequently re- 
viewed by a general board for the state. Upon the ba- 
sis of the valuation of property so determined, the taxes 



STATE TAXATI02T. 259 

for state purposes are apportioned to each county, city 
and town. By general statute, or by special city char- 
ters, each county, city, town and school-district is au- 
thorized to levy taxes for local purposes. These also are 
apportioned on the basis of the state valuation, except in 
case of certain improvements in cities, such as opening, 
paving and lighting streets, which are charged upon the 
adjoining property in proportion to the benefit conferred.^; 
Generally, all these taxes both for state and local purposes 
are collected in each town or city vrard, at one time, by 
one collector, who is furnished with a tax-list covering 
all. 

If other means fail, goods may be levied on to secure 
the taxes, and according to prescribed forms of law, lands 
may be sold for delinquent taxes, the title thus given, be- 
ing made complete and valid after a certain period allowed 
the original owner for redemption. 

In most of the states, local taxes are adjusted on the 
principle generally aiiraitted that equitable taxation re- 
quires property of every hind to be assessed. In actual ex- 
perience however, property in the form of real-estate bears 
by far the larger share of the burden. Personal property 
can be easily concealed or removed by those who wish to 
evade their share of contribution to the public weal. On 
this subject, the prevalent moral sentiment is low and 
consciences are weak to resist the strong temptation to 
make false returns and even to commit perjury, when 
detection is almost impossible. The difficulty of attaining 
a perfect result is aggravated by the complexity of our 
government. Property in railways, banks, etc., being 
within the jurisdiction of one state, while the owner resides 
in another, involves peculiar difficulties. These and other 
like considerations have occasioned much earnest discus- 
sion, on the part of economists, lawyers and statesmen, 
respecting the property on which taxes should be imposed. 



260 DISTRIBUTION". 

We may not here enter at length into these discussions, 
but one question which especially involves some principles 
of our science deserves some notice. 

Are Evidences of Debt, Property, on ivMch 
iaxes should he levied? In defining wealth, we showed 
that notes, bonds, mortgages and the like are not, of them- 
selves, any part of the general wealth. They indicated only 
what the lawyers call ^' an inchoate title" to possession, a 
mode in which some real wealth is distributed. They are 
symbols, not substance, whose multiplication makes no in- 
crease of real wealth. Suppose A. B. holds his neighbor's 
note for two thousand dollars, secured by mortgage on his 
farm worth four thousand. The property is one, the 
farm. The note and mortgage only indicate that A. B. 
has a lien on that property for one half its value. The 
loan made and the security given have added nothing to 
that value. That property is rightfully subject to taxa- 
tion. Who shall i^ay the tax 9 Strictest equity might 
admit that each of the parties should pay a half ; and that 
might be established as the rule. But in the very terms 
of the mortgage, the owner of the farm engages to pay all 
taxes that may be levied on the land, and this is a part of 
the contract, the interest to be paid on the amount boi'- 
rowed, being adjusted to that usage. Now, if the owner 
of the farm is taxed for its full value, and A. B. is also 
taxed on the mortgage he holds, there is a douhU taxation 
on two thousand dollars. The fact is obvious and cannot 
be controverted. Where this rule prevails, there is evi- 
dently an obstruction to the free flow of capital, which 
works disadvantage to all economical interests. 

The case of a note given without security is essentially 
the same. Suppose for instance, that C. D. sells his 
neighbor a horse for one hundred dollars and takes in pay- 
ment a note for the amount, payable at the end of six 



DOUBLE TAXATION". 261 

months, without security, depending on the man's ability 
to pay out of the avails of his industry, in the meantime. 
Here evidently, there is only one item of property, that is 
the horse. To lay a tax on the horse for its new owner to 
pay, and to tax 0. D. on the note he holds, is evidently 
doubling the taxation. When the note is paid, the horse 
being in good condition, another property appears in the 
money received by 0. D., and on- that he may properly be 
taxed. To vary the case a little, suppose that instead of a 
note payable in money, the purchaser of the horse, being a 
wagon-maker, gives an obligation to build for C. D. a 
wagon worth one hundred dollars, to be finished and deliv- 
ered at the end of six months. Evidently, the horse is, 
but the wagon is not in existence when the contract is 
made. When the obligation matures and is fulfilled by 
the delivery of the wagon, there are two items of property, 
both rightfully taxable. But the promise pending has in 
it nothing real, nothing taxable. The principle runs 
through the whole system of credit. Prosperous industry 
is continually creating new items of property but the credit 
that runs in divers forms through all the ramifications of 
business, of itself creates nothing, and has not that ^'physi- 
cal actuality " which is essential to the idea of property. 

A case involving this question and also the question of 
state jurisdiction respecting taxes has recently occupied 
the attention of the Supreme Court of Errors of the State 
of Connecticut, and is now, on appeal, before the Supi'eme 
Court of the United States. Mr. K., a citizen of Connec- 
ticut, had loaned money through an agent, a citizen of Illi- 
nois, on bonds secured by deeds of trust, on real estate, in 
the city of Chicago. Each deed of trust provided that 
the borrower should pay all taxes assessed on the property 
without abatement on account of the mortgage lien,~and 
the taxes on the entire property were accordingly paid 
under the laws of Illinois. The Connecticut collector 



263 DISTRIBUTION. 

added the amount of the loan to Mr. K.'s tax list in that 
state, and when payment of the tax was refused, proceeded 
to levy his tax- warrants on real estate belonging to Mr. K. 
He brought the case before the court, by petition for an 
injunction. A majority of the judges on the bench decided 
that the bonds were taxable, and that it came within the 
jurisdiction of Connecticut to lay and collect this double 
tax. Judge L. S. Foster, however, gave a dissenting 
opinion. His judgment on the question now before us is 
thus clearly and forcibly expressed. " Property and a 
debt, (considered as a representative of the property 
pledged for its payment,) constitute lut one subject for the 
'purpose of taxation. The tax being paid on the property, 
without diminution on account of the debt, nothing 
remains to be taxed. The debt indeed, aside from the 
property behind it, and of which it is the representative, is 
simply worthless." We believe that this opinion has all the 
force of an axiom of political economy. We trust that 
the court of last appeal will sanction this opinion and thus 
hasten the day when it shall be generally acknowledged 
and applied in the imposition of taxes, to the correction of 
much unsound and mischievous legislation, and to the 
promotion of equity and morality. 



CHAPTER XIX. 

FOUETH DIVISION.— EXCHANGE. 

The Nature of Exchange. — In a broad, general 
view, Exchange is a part of the machinery of society for the 
transfer of ivealth from producers to consumers. It is a 
very complicated piece of machinery, as clearly appears if 
one will undertake to trace the cotton which enters into 
the structure of the shirt he wears, back to the field on 
which it grew. It is a machinery whose range of opera- 
tions is co-extensive with the surface of our globe, as will 
be seen, if one will but consider how many parts of the 
world are made to contribute to the sum of daily comforts 
with which his table and his home are furnished. Hence, 
in the science of PoHtical Economy, it holds a place of 
highest importance ; so that it has been proposed to sub- 
stitute as a title for the science, the term Catallactics or 
the science of Exchanges. 

The general arena of exchange is called the Marlcet, 
and in all the processes of production, the market is the 
object most nearly and directly contemplated. There, 
whatever is produced, except the very little of his own pro- 
ducts which a man consumes, is first to be disposed of ; 
and in every step of the process, the question is before the 
producer's mind, what will this article bring in the mar- 
ket ? This will be determined by the answer given to two 
other questions. First, What want or desire of man will 
this article gratify and hoiv intense is that desire ? and 
Second, What outlay of labor and capital is requisite to 



264 EXC^AKGE. 

produce fMs article ? Thus, on the broad field of the 
world's exchanges, commodities, in almost infinite variety, 
meet and mingle, each marked with a sign of Value which 
is a simple exponent of these two elements, utility, or de- 
sirableness and cost. 

More specifically, we may say, Exchange is a transac- 
tion in which two parties volu7itarily transfer to each other 
the right of property in certain items of wealth, which are 
regarded as equivalents. This transfer must be voluntary 
by both parties, else it involves robbery. If without the 
right of property, anything is given in exchange, it is 
fraud. If one gives in exchange a horse which does not 
belong to him, he confers no right of property, for he has 
none to confer, since the real owner may, at any time, 
reclaim the animal. It is often said that exchange may be 
either of commodity for commodity, as when one gives a 
table for a pair of boots ; or of commodity for labor, as 
when one gives fifty pounds of flour for a day's work at 
mowing ; or of labor for labor, as when a mason gives a 
day's work to a carpenter on condition that the carpenter 
shall on call, give a day's work at his trade, in return. 
This is proper enough as indicating in each instance, the 
precise form of the transaction. But in reality, the labor 
is not ever, itself the thing contemplated, but the value, 
in some form of wealth, which is the product of the labor. 
In discussing the principles of distribution, we saw that 
even when wages are paid for labor, the employer has his 
eye always on the value to be produced, though it may be 
that several kinds of labor must be combined before the 
value appears in a form to be exchanged. 

Value is thus the central term of this branch of our 
science. Let its definition, as given in the second chapter, 
be here distinctly recalled. 

Value is purchasing power, or that quality in an ob- 



VALUE. 265 

ject which giTes it power to command other objects 
in exchange. 

Value is ahvays a relative term, and indicates not an 
absolute quality of an object, but a power revealed by a 
comparison of it with another object. 

Value may be determined iy comparison between any 
two oijects, and must not be confounded with price which 
makes money the one thing with which every thing else 
must be compared. 

Value implies utility, or adaptedness to gratify desire, 
but is to be distinguished from it, since many things of the 
highest utility such as the air we breathe, have no value, 
because they are not the fruit of labor, and cannot be ex- 
clusively appropriated. 

Hence, as was just stated, Value is a simple exponent 
of the two elements, utility and cost. These terms respect- 
ively define the limits of value. The maximum, limit of 
value in an object, is defined by its utility or desirableness. 
The minimum limit of value in an object, is fixed by its 
cost. Objects presented for exchange are always primarily 
compared with respect to these two considerations. 

Between these two extreme limits however, there is 
room for considerable variation of value under the law of 
supply and demand. By demand is meant the extent of 
desire for any article. Supply expresses the quantity of 
the article in the market, ready to meet that desire. When 
demand is great in proportion to supply, value is enhanced. 
When supply is great in proportion to demand, value is 
reduced. The law is expressed in a simple formula, appli- 
cable to all things that can be exchanged, thus, Value rises 
directly as the demand, inversely as the supply. Hence in 
all transactions of exchange, the state of the market needs 
to be carefully considered. There, free competition tends 
to produce an equilibrium between supply and demand. 
When the supply of any article is excessive, its value sinks 
12 



366 EXCHANGE. 

SO that it will not command an equivalent for the labor 
and capital necessary to prodnce it ; the production of it 
is therefore curtailed till the supply is reduced to a level 
with the demand. When on the other hand, the demand 
for an article is excessive, the consequent rise in value 
makes labor and capital in that form of industiy more 
remunerative than ordinary, and thus its production is 
stimulated till the supply is brought up to a level with the 
demand. To express the expense of labor and capital in- 
volved in the production of any commodity, the term Cost 
is employed. Comj>etition tends to make cost the general 
standard of value. Hence we have for the rates of ex- 
change, or the value of articles transferred, this general 
formula. 

Vahie=cosi+or — the effect of the ratio of demand to 
supply. 

The effect produced by variation of the ratio between 
demand and supply will be greater or less according to 
several circumstances. 

a. The Durability of the commodity. An increased 
supply of articles, such as fresh fruit and fish, which are 
quickly perishable, causes a great reduction of value. On 
the contrary, the market value of a durable article like 
iron ware and cloth, is but slightly aSected by increased 
supply. 

b. The Ease or Difficulty of Increasing the Supply. 
Manufactured articles can generally be produced easily aiid 
quickly, after the facilities are once established. The 
farmer's crops come in but once in a year. Hence a short 
supply of wheat or potatoes raises the value of those arti- 
cles much more than a short supply of woolen goods or 
shoes advances the value of those articles. 

c. The character of the article as a Necessity' or a 
Luxury. Under the pressure of scarcity, men will dispense 
with luxuries, rather than pay their enhanced price. Such 



FUNDAMENTAL PEINCIPLES. 267 

articles as bread and fuel, they must have at any price. 
In the first case, the demand declines as the value rises on 
account of a diminished supply, and the ratio adjusts 
itself. In the other case, the demand is intensified as 
the value is advanced by scarcity, because the limits of 
man's power to endure hunger and cold admit of but little 
- room for any adjustment, and " all that a man hath will 
he give for his life." 

d. The relation of the article to incoming or outgoing 
Fashion. The freaks and the tyranny of fashion are pro- 
verbial. In highly civilized society, her sway is undispu- 
ted. Those things which are made to meet her demands 
are called ^'fancy-goods." Both the producer of these arti- 
cles and the dealer in them must study carefully her 
changing moods. The demand for articles conformed to 
the latest style is exceedingly intense and gives them a 
value far above cost ; but the reaction is apt to come sud- 
denly, following no definable law. An over supply of 
goods that are just going out of fashion can be exchanged 
only at a value gi-eatly below cost, though their utility, 
as means of comfort, may not be in the least impaired. 
The successful tradesman sees to it that his gains at the 
hour of flood-tide are sufficient to compensate the loss inci- 
dent to the ebb. 

The fundamental i^rinciples of Exchange then are few, 
and may be clearly and concisely stated. It is of the 
highest consequence that they be well understood. There- 
fore, repeating some things already presented, we give here 
a summary statement, adopting the distinctions, and to a 
considerable extent the precise language, of Mr. J. S. 
Mill. 

All things that are bought and sold may be distributed 
into three classes. First, There are things of ivhich it is 
physically impossible to increase the quantity beyond cer-r 



268 EXCHANGE. 

tain narroiv limits. Such are ancient sculptures, paint- 
ings of old masters, rare books or coins, and wines that 
require peculiar conditions of soil, climate and exposure. 
Second, There are things which at a moderate outlay of 
labor and capital, can le multiplied indefinitely. The 
majority of things bought and sold belong to this class. 
With laborers and machinery enough, such things as cot- 
tons, woolens, shoes, hats, might be multiplied a thousand 
fold, or at least, till the measure of the earth's capacity to 
afford materials is reached. Third, There are commodities 
lohich can he produced in limited quantity at a given cost ; 
hut to increase the quantity involves a much greater 'pro- 
portional cost. To this class belongs the agricultural pro- 
duce of a limited area of land. A field that yields twenty- 
five bushels to the acre, may be made to yield forty bushels, 
but the cost will be much more than doubled. With 
these distinctions and points before presented, in mind, 
the following principles will be plain and almost self-evi- 
dent. 

1. Value is a relative teryn. The value of a thing 
means the quantity of some other thing, or of things in 
general, for which it can be exchanged. The values of all 
things can never therefore, rise or fall simultaneously/) 
There is no such thing as a genei'al rise or a general fall 
of values. Every rise of value supposes a fall, and every 
fall a rise. 

2. The temporary or market value of a thing depends 
on the demand and supply ; rising as the demand rises and 
falling as the supply rises. The demand, however, varies 
with the value, being generally greater when the thing is 
cheap than when it is dear ; and the value always tends to 
adjust itself so that the demand shall be equal to the 
supply. 

3. Things have also a permanent, or as it may he- called 
a Natural Value, to which the market value, after every 



FUNDAMEIfXAL PKINCIPLES. 269 

variation, always tends to return ; and the oscillations com- 
pensate for one another, so that on the average, commodi- 
ties exchange at about their natural value. 

4. The natural value of some things is a scarcity value ; 
but most tilings ^naturally exchange for one another iji the 
ratio of their cost of production, or at what may be termed 
their cost-values, 

5. The things which are naturally and permanently at 
a scarcity value, are those of ivhich the supply cannot be 
increased at all, or not sufficiently to satisfy the whole of 
the demand which would exist for them at their cost value. 

6. A Monopoly value means a scarcity value. Monop- 
oly cannot give a value to anything, except through a limi- 
tation of the supply. 

7. Every commodity of which the supply can be indefi- 
nitely increased by labor and capital, exchanges for other 
things proportionally to the cost necessary for producing 
and bringing to market the most costly portion of the sup- 
ply required. The Natural value is synonymous with the 
Cost value, and the cost value of a thing means the cost 
value of the most costly portion of it which the marhet 
demands. 

8. If one of two things commands, on the average, a 
greater value than the other, the cause must be that it 
requires for its production, either a greater quantity of 
labor, or a hind of labor per manently paid at a higher rate ; 
or that tlie capital or part of the capital which supports 
that labor fnust be advanced for a longer period ; or that 
the production is attended with some circumstance which 
requires to be compensated by a permanently^ higher rate of 
profit. 

Assuming that there is, as there ought to be, free com- 
petition in the processes of Exchange, as in the processes 
of Production, the pertui'bations of value caused by varia- 
tions of demand and supply continue only during a period, 
which cannot exceed the length of time necessary for alter- 



370 EXCHANGE. 

ing the supply. Under the pressure of competition, de- 
maud and supply always rush to an equilibrium ; but the 
condition of stable equilibrium is when things exchange for 
each other according to their cost of production, or at what 
is fitly called their natural value. 

The Necessity of Exchange. — If every man were 
able and content to live by himself, upon the fruits of his 
own labor ; or if the members of each household could 
satisfy all their desires by the proceeds of their Joint indus- 
try, there would be no occasion for exchanges. But with 
his unfolding intelligence, man's desires multiply and 
reach out beyond the range of his present attainments, 
beyond the range of his own ability too. At the same 
time, to his searching inquiries, nature reveals new means 
of enjoyment which both gratify and stimulate desire, add- 
ing to a present gratification of the senses, the zest of 
discovery and achievement, and the pleasure of hope which 
fondly anticipates more and better things to come. There 
are also in man's nature, as a social being, interests, 
attractions, sympathies which multiply and widen his 
associations and his opportunities, as both a giver and a 
receiver of good things. Thus individuals are grouped in 
families, families unite in communities, communities form 
states and nations, and nations all round the world, inter- 
lock their interests. Under a law of interdependence which 
necessitates mutual exchanges — the giving and receiving 
of benefits — human intercourse runs into civilization, and 
no limits can be set to either its extension or the variety 
and intricacy of its relations. The structure of the tvorld 
ftirnishes the means of exchange or trade ; and the nature 
of man compels him to trade. Exchange is therefore a 
necessity hy the fixed conditions of our being. 

The same thing appears in another light. "We have 
seen that for the production of wealth, human lahor must 



NECESSITY OF EXCHANGE. 271 

he applied to objects of nature. The labor thus put forth 
establishes u right of property, partial or incomplete, over 
the objects produced ; and the title to possession thus 
secured, is exclusive and transferable. But different per- 
sons are constituted by the Creator with different aptitudes 
for different kinds of labor, and with coi-responding likes 
and dislikes with respect to occupations. Both the com- 
fort of the individual and the general advantage are pro- 
moted by every one's devoting himself to that occupation 
which he prefers, and for which he is especially fitted. 
Each will do his best and achieve the largest results when 
his efforts ai-e put forth in accordance with the bent of his 
own genius and inclination. Under such a distribution of 
employments, however, every man becomes the producer of 
but a single product, or, at most, of one kind of wealth, ' 
and of this he produces far more than he can use for his 
own gratification. At the same time, he has desires for 
the enjoyment of a thousand other objects which must be 
produced by the industry of others, each of whom has a 
surplus like his own to be disposed of. All this varied, 
accumulated wealth must be utterly useless, unless by some 
process of mutual exchanges, each can get lolud he wants 
by giving what he can spare. 

Furthermore, we have seen that for the most economi- 
cal and profitable production of wealth, a much more mi- 
nute division of labor is requisite. The diverse labor of 
twenty men may be combined in the production of a single 
object. The part which each performs is of little or no 
use to anybody, except as it enters into the combined 
result. He who in a watch-factory, for instance, devotes 
all his labor to making little screws by the thousand, can 
put the things which he produces to no immediate use for 
himself; perfect and beautiful as they are, a bushel of 
them will do nothing to satisfy the cravings of hunger. 
A hundred men may each contribute some part towards 



272 EXCHANGE. 

the structure of a steam-engine and no one of them can 
ever turn to his own benefit either the part which he makes 
or the whole machine, if he were allowed to appropriate it. 
In this case, and in hundreds of similar eases, there is ah 
absolute necessity of some system of exchanges through 
which the one total value made up by the labor of many 
different Jiands, can he broken up and distriMtted so that 
each one's varied wants may he met and satisfied. 

AVe may say then, in brief, that the diversity of nature's 
resources, the diversity of human capacities, and the wide 
reach of human desires, all of which prescribe for human 
industry the principle of division of labor, necessitate ex- 
change. The conditions of our being demand the pro- 
cesses of exchange as imperatively as the processes of 
production. Without exchange, there could be no divis- 
ion of labor, and of course only the smallest possible 
amount of production. Without exchange, there would 
rarely be any stimulus to labor, for labor could add but 
little to our means of gratification, beyond the most abso- 
lute necessaries of life. There would be no stimulus to 
form society, since, as man depended solely on himself, he 
might as well be solitary as social. Hence, all progress in 
civilization would be barred, and the generations of men 
would be held forever within the limitations, doomed to 
the comparative isolation of the savage state. 

The same principles apply with equal force to the ex- 
changes between different nations. 

The aptitudes of different oiations for the creation of 
different products, has in many cases been fixed by un- 
changeable, geographical, and physiological law. Cotton, 
coffee, spices, dye-stuffs, sugar, rice, and many of the most 
valuable fruits and medicines, can be cultivated only in 
southern latitudes. Wool, wheat, and bread-stuffs gener- 
ally, flax, and the most valuable animals, are produced 



INTEKN"ATIOIfAL EXCHANGE. 273 

only in temperate climates. Iron is found in northern 
latitudes, and furs, hemp, and feathers are brought from 
climates still further north. One country is better adapted 
to commerce, another to agriculture, and another to manu- 
factures. 

Besides, as we have already shown, a nation at one 
period of its history, is better adapted to one sort of produc- 
tion than to another. When capital is scarce and land is 
cheap and fertile, a state is better adapted to agriculture ; 
when capital becomes abundant and land dear, it becomes 
gradually better adapted to manufactures. Thus nations, 
as well as individuals, both by original endowment and 
accidental circumstances, have their special adaptations to 
the creation of particular products. Nations are like indi- 
viduals, disposed to avail themselves of the peculiar advan- 
tages bestowed upon them by their Creator. Self-interest 
teaches them this lesson with sufficient clearness, and they 
willingly practice it, if left to their own natural instincts. 

It is also evident that, by each nation's devoting itself 
to that branch of production for which it has the greatest 
facilities, either original or acquired, its own happiness will 
be better promoted, and a greater amount of wealth will 
be created, than in any other manner. And while all 
nations thus appropriate their industry, a much greater 
amount of products will be created for the whole human 
race, than by any change that could possibly be made. If 
Cuba should relinquish the raising of coffee and sugar, and 
devote herself to the raising of wheat, and New York, 
relinquishing the culture of wheat, should betake herself 
to the raising of coffee and sugar, would not both com- 
munities be poorer, and would not the price of coffee, 
sugar, and wheat be increased over the whole world ? 

But, while it is thus evident that every nation is in- 
tended by the Creator to improve its own advantages, by 
producing that for which it has the greatest facilities, it is 
12* 



274 EXCHAKGE. 

also the fact, that every nation, mid every individual of that 
nation, desires the productions of every other nation, and is 
happy in proportion as they are enjoyed. What nation 
could be happy without the cotton of the south, the hemp 
and iron of the north, or the wool, wheat and manufac- 
tures of temperate climates ? Nay, let any one look at the 
clothes which he wears, the furniture of his room, or the 
food and utensils of his table, and he will be immediately 
convinced, that every latitude of both hemispheres, and 
almost every country on the globe are tributary to his hap- 
piness. His own country has peculiar adaptations, but 
they are adaptations for but few products, while every 
citizen of that country requires for his convenience, nay, 
almost for his existence, the productions of every other 
country. These desires can be gratified only by national 
exchanges. Hence we see that national exchanges enteg 
into the constitution of things under which we are created, 
as much as individual exchanges. 

And the final cause, of this constitution is in both cases, 
equally evident. Individuals are made thus dependent 
upon each other, in order to render harmony, peace, and 
mutual assistance, their interest as well as their duty. 

And for the same reason, nations are dependent upon 
each other. From this universal dependence, we learn 
that God intends nations, as well as individuals, to live in 
peace and to conduct themselves toward each other upon 
the principles of benevolence. Where all are mutually 
dependent, no one can prosper without increasing the pros- 
perity of all, nor suffer without bringing suffering upon all. 
Hence, it is as truly our interest to seek the happiness, 
peace and prosperity of other nations, as it is to seek the 
happiness, peace and prosperity of our own nation. 

The Agents of Exchange. — The business of ex- 



AGEN"TS OF EXCHANGE. 375- 

cliange is obviously a distinct department of useful indus- 
try. By it, commodities, after they are produced, are 
brought within the reach of consumers, so that they can 
have them in such places, at such times and in such quanti- 
ties as are most convenient. This involves labor, and so 
far increases the cost of the objects ; it also adds to their 
desirableness ; hence, in both ways their value is increased. 
The value of commodities in the last exchange which 
passes them to the consumer is, on the average, probably 
double that at which they pass from the hands of the origi- 
nal producers. We have no reason to complain of this, 
for their utility as well as their cost, is increased by every 
step of the process. Coal at the mouth of the Pennsylvania 
mines cannot minister to the comfort of a home in Chicago. 
The bales of calicoes which are turned out of the mills in. 
Lowell, cannot clothe the farmers' daughters on the Illinois 
prairies, until they have been transported, broken up and 
distributed so that the keeper of the country store can 
show the goods and measure off by the yard Just what they 
want. The poor laborer, who easily buys a dollar's worth 
of sugar at a time, would deem it a hopeless undertaking 
for him to pay for a barrel of the article at once. The 
consumer can well afford to pay for- having things pre- 
sented, so that he can get them just where and when and 
as they will best meet his wants. 

On the other hand, the producer is no less benefited 
by this intermediate agency. In civilized society, labor is 
divided so that one raises farm produce, another works on 
iron, another on wood and another on leather, etc. Now, 
if each one is obliged to suspend his labor and go out to 
find purchasers for his products, much time will be lost. 
It would clearly be a great benefit to the whole community 
if, while others are busy with their various forms of pro- 
ductive labor, one should devote himself to the business of 
making exchanges. Each producer might then deposit 



276 EXOHAIiTGE. 

with him whatever he had to offer in the market, and take 
in exchange whatever lie found adapted to his own wants. 
Meantime, he who gives his entire attention to exchanges, 
learns the wants of the community, acquires by habit 
good judgment in estimating the quality of the articles he 
handles, and exercises his invention to facilitate the satis- 
faction of wants, to the advantage of all. Thus, the prin- 
ciple of Division of labor which adds much to the economy 
of production, is equally applicable to the industry of 
exchange. It requires that certain persons devote them- 
selves exclusively to this labor of effecting exchanges, and 
that they receive a fair compensation for their service. 
Both producers and consumers share in making up that 
compensation by the percentage charged on the values 
transferred ; that is, the producer sells his products to the 
exchanger for a little less than he would receive if he sold 
them directly to the consumer, and the consumer pays the 
exchanger a little more for what he wants than if he bought 
directly of the producer. But the expense of conducting 
the exchanges is far less than it would be without such 
intervention. 

Merchants is a general name for those who devote them- 
selves to the business of exchange. But the principle of 
division of labor applied to this form of industry, intro- 
duces a considerable variety of agents with a corresponding 
diversity of names. We shall not attempt to present a 
full list of the names, nor a full exposition of the various 
forms of service rendered. But a few may be specified to 
set forth in a general way, the phases and functions of the 
world's multiform and wide-spread commercial operations. 
Since by its very nature, exchange always involves giving 
and receiving, we must recognize in the commerce of every 
community and nation, two great currents of trade — an 
outgoing current and an incoming cxirrent. The outgoing 



AGENTS OF EXCHANGE. 277 

current bears away what a people have to spare ; the in- 
coming current brings back what a people want. Each of 
the^e currents has its own agencies, at different stages of 
the movement. 

Let us suppose ourselves in a section of country whose 
chief productions are the fruits of agriculture — in the grain 
regions of the west or the cotton regions of the south. 
Each farmer's crops bring him a surplus quite beyond what 
he can use for his own needs. How is he to dispose of it ? 
When the country is new, he has no alternative ; he must 
himself transport it twenty, fifty, a hundred miles, it may 
be, to the nearest place of trade, and there make his sale, 
and with the avails purchase whatever he most needs. But 
as soon as settlers are sufficiently multiplied, some one 
opens a store in the farmer's immediate neighborhood. 
We call him a Retail merchant, for he has all sorts of goods 
to sell, in quantities as small as any may wish. For the 
goods he sells, he is willing to receive whatever his custom- 
ers have to spare, making his own arrangements for trans- 
porting the produce to a larger market. His title, retail- 
merchant has respect only to his sales in small quantities. 
But for the time, he occupies a double position and fulfills 
a double function. He stands at the extreme end of the 
line of incoming trade, for the articles which he sells mak- 
ing the last transfer, that passes them directly to those 
whose wants they are to satisfy. He stands also at the be- 
ginning of the hne of outgoing trade, gathering up those 
surplus products of his neighborhood which, starting on 
their course from his hand, are to float on the current of 
trade, half round the world, it may be, to find their ulti- 
mate consumers. As population grows more dense, and 
wealth increases, another agent appears on the ground. 
He is called sometimes a middle-man, sometimes 2i produce- 
buyer, sometimes a commission- dealer. By arrangement 
with some house at a commercial centre, he is authorized 



278 EXCHA2!fGE. 

to buy for others the grain, the cotton, the beef, the pork, 
the wool, the eggs, the butter, the cheese, or whatever of 
one kind or of many kinds of produce may be ordered, and 
is compensated by a percentage or commission on the 
values purchased. To him the store-keeper readily resigns 
one part of his business, and the rills from many fountains 
are gathered into a regular flowing stream. With the in- 
troduction of railways, come in the roarehouse-men, one at 
every station, who works in a small way to send a portion 
of the country's products into the great warehouse or ele- 
vator of his correspondent in the commercial emporium. 
The farmer now has his option either to sell outright to the 
agent near home, or to send what he has to the distant 
city, there, for a small fee, to be stored, while he takes his 
chances with the general market. So we recognize in the 
interior city, other agents connected with the outgoing 
current, such as the Consignee and the Produce-broker, 
who pass on the stores accumulated in Chicago and Buffalo, 
to the s1iipping-r)ierc1iani of the great seaport, New York or 
Baltimore, thence to be exported to the ends of the earth, 
as the needs of men may require. 

In former times, when manufactured articles were 
mostly made by hand in a small way, at the scattered 
homes of workmen, such products were gathered and 
thrown upon the current of trade, in much the same man- 
ner as that just sketched. But the extensive use of machi- 
nery in these later years, has concentrated manufacturing 
industry in large establishments, whose products are passed 
out upon the currency of trade through the agency of Fac- 
tors or commission mercliants. Each large factory or mill 
has its agent of this kind in one of the great commercial 
centres, to whom the greater part of the products are sent, 
as soon as finished, and he manages the sale and distribu- 
tion of them in the general market, receiving his compen- 
sation, sometimes by salary, oftener by a percentage on 



AGENTS OP EXCHANGE. 279 

the amount of sales. A domestic factor is one who 
renders this service in the country in which the goods are 
made ; a foreign factor attends to the business in another 
country. 

To understand the functions and agencies connected 
with the incoming current of trade, we take our stand at 
the jDort of entry, say New York. Here the agency of the 
Importer is first to be noticed. He studies the wants of his 
own country and the products and prices of foreign coun- 
tries, generally with respect to a particular kind of com- 
modities ; and as a real purchaser, orders what he thinks 
the needs of the country demand. The goods thus im- 
ported he sells generally in bulk, by sample, to the Wliole- 
sale-mer chant. He opens them more fully and sells by 
bale or case to the Jobber. Of him the Retail-merchaiit 
buys by the piece and smaller package, and through him, as 
he passes them to his individual customers in such quanti- 
ties as they desire, the distribution is complete. 

To all these agents, must properly be added the whole 
class of Bankers, Brokers and Dealers in exchange drafts, 
etc., who have to do with money and credit, the instru- 
ments of exchange ; also, those who as Tinder lor iters and 
Insurers, give special attention to guarding the risks, by 
land and by sea, involved in trade. But these will come 
up for more particular notice in another connection. 

Thus in outline, we get a view of the manifold pro- 
cesses and agencies of exchange. In the actual operations 
of commerce, these functions are further divided, partially 
combilied, variously diversified, minutely ramified, so that 
the complications of trade become extremely intricate ; and 
yet by some hidden law of self-adjustment, the machinery 
works out its legitimate result, so that the wants of men 
are met, with little waste of the products of human indus- 
try. It is an exceedingly economical arrangement. 
Though the price which the consumer pays for his yard of 



280 EXCHAKGE. 

cloth covers something paid to the agent of every succes- 
sive transfer through which it has passed, yet it is less, by 
much, than it must have been without this organized sys- 
tem of exchange. Exchangers are as necessary to the 
cheapness of production, as producers themselves. Let 
competition be free with both producers and exchangers, 
and all things will come into the consumers' hands as 
nearly as possible at their natural value. The machinery 
of exchange is worth all and more than all it costs. We 
see how absurd is the outcry sometimes made against those 
engaged in mercantile business that they produce nothing. 
The general tendency of their service is to cheapen every- 
thing offered in the market and to enrich the market by 
a thousand-fold multiplication 'of comforts and luxuries for 
the life of man. The laborer may sometimes feel like com 
plaining, that the merchant has an easy time sitting at his 
desk, while he is sweating at his hard toil ; that the mer- 
chant rides in his carriage, while he trudges on his weary 
way afoot ; that the merchant is rich, while he is poor. But 
if he considers how a hundred merchants fail, where one 
succeeds ; how intense and wearing is the merchant's hrain- 
worh ; how sickening often amid his perplexities, is the 
showy style of his mode of living ; and above all, how inti- 
mately connected are the services of the mercantile class 
with both the wages which he, the laborer earns, and the 
cheapness of everything he buys in the market for his sup- 
port, he will hush his complaint, under the conviction that 
no lot in life is free from its trial, and that the interests of 
men of different occupations are so woven together that 
adversity to one class is gidversity to all, and true prosper- 
ity for one is prosperity for all. 

While we thus fully recognize the useful, indispensable 
service rendered by the agents of commerce, sound econ- 
omy requires that the number and expense of these agen- 
cies be reduced as far as practicable, consistently with the 



AGENTS OF EXCHANGE. 281 

free and effective action of this importaiit machinery of 
civilized society. At the same time, there is occasion for 
warning and protest against the abuse of the power in their 
hands which we s«e sometimes practised by these agents. 
A single trader or a company of traders combining may 
avail themselves of their knowledge of the state of the 
market to produce an artificial scarcity, that they may by 
suddenly raising prices rob the people and enrich them- 
selves. Thus in the grain trade which centres in Chicago, 
by secret conspiracy, such " corners in wheat" have been 
produced, to the serious injury of other dealers, and of 
consumers and indirectly of the farmers with whose pro- 
duce they thus gamble. Sometimes an opposite course is 
taken, and the trader uses an advantage he has gained for 
the hour to produce an artificial but temporary cheapness, 
to be followed by a sudden rise of prices which will more 
than compensate his first loss. Too many of the so-called 
" Boards of Trade," not only tolerate but countenance and 
encourage such abuses of trust and power. Both justice 
and philanthropy cry out against sucli proceedings, and 
the word of God seems to warrsint the ban of righteous 
indignation — '' He that withholdeth corn, the people shall 
curse him ; but blessing shall be upon the head of him 
that selleth it." 



CHAPTER XX. 

MONEY AS AN INSTKUMENT OF EXCHANGE. 

Money. — Exchange, like every other department of 
industry, may be greatly facilitated by the use of proper 
instruments. Simple Barter, that is the exchange of one 
commodity for another without the intervention of any 
common standard or medium, may meet all the exigencies 
of savage life, where private property is restricted to a 
narrow range and exchanges are few. But as society 
emerges from that state into civilization, exchange in kind 
becomes embarrassed by many and serious difficulties. 

Suppose a man has made a table with which he desires 
to buy bread, meat and shoes. If shut up to barter, he 
must first find some one who wants a table of just that 
size and style. Then he must find probably three other 
parties who make and have to spare the articles he wants. 
Then by a series of negotiations with them and others, he 
must bring about such a division and distribution of the 
value of his one table, as shall give to the baker, the 
butcher and the shoemaker a fair equivalent for that which 
he desires from each. The outlay of time and labor neces- 
sary to effect the desired exchange in this way, must be 
fully equal to that required for making the table. The 
question naturally arises, is there not some means by 
which this expenditure, or the greater part of it, can be 
saved ? 

The difficulty is still greater when a compensation is to 
be provided tox labor. The farmer, in the spring, calls in 
the help of a man to plow and cultivate his fields. This 



DIFFICULTIES OF BARTER. 283 

labor will create value, but months must pass before that 
value will appear in form to be exchanged. Meantime, 
the laborer has wants that clamor tor present satisfaction ; 
but how can those wants be provided for unless by some 
device which shall permit the fruits of his labor to be 
drawn upon, before they appear in the riijened crop ? The 
case is yet worse with the workman in an iron foundry. 
How can he and his family be fed and clothed, if he must 
take his pay in the iron which he helps to produce ? 
More embarrassing still is the difficulty as labor becomes 
minutely divided, for the most productive methods of 
civilized industry. When a man devotes himself wholly 
to making rivets for knife-handles, or to giving edge or 
polish to knife-blades, how is he to subsist by exchange in 
kind? 

It would bring some relief to these embarrassments if 
an establishment were set up and opened as a store, where 
all the various articles which any in the community desire 
to exchange might Imj gathered under the charge of some 
one especially skilled in negotiating exchanges. But 
then, an ever recurring difficulty would be experienced in 
adjusting the equation of value hetioeen different articles, a 
shovel and a pair of boots, for instance ; and for the com- 
pensation of labor, especially under the minute division 
of labor, scarcely any relief could be obtained. Under the 
pressure of these difficulties, men have been driven to the 
invention and adaptation of certain instruments, which 
bear the same relation to the operations of exchange, which 
tools and machines do to the processes of mechanical indus- 
try. By a common instinct of discovery and adaptation 
to a need universally felt, peoples of different ages and 
countries have taken up essentially the same means of 
relief ; and their evident fitness for the purpose, rather 
than any authoritative enactment, has secured their uni- 
versal adoption. 



284 EXCHANGE. 

Money and Credit constitute the two great instru- 
ments of exchange. Of the two, money is both in order 
of time and of importance, i5rst. It is all essential to civil- 
ized trade, and without it the other has little or no mean- 
ing. Yet credit, though only a representative or symbol 
of money, and always subordinate to its control, is really 
the working-engine which accomplishes far the greater 
part of the work ; when properly regulated, giving effect- 
iveness and balance to a world-wide commerce, but when 
abused, causing disturbance, convulsion and disaster 
through the entire system. A clear apprehension of the 
nature and functions of th^se two instruments of exchange 
is of the highest importance to an understanding of the 
science of political economy ; it is of no less consequence 
to the successful practical management of mercantile busi- 
ness and of public finance. We attempt, therefore, a clear 
and distinct exposition of elementary truths pertaining to 
these two things, with fullness enough to indicate at least, 
the chief points of its practical application. 

Money may he defined to he some useful product of labor 
which serves as a standard of value hy which wealth of every 
hind is measured, and as an instrument hy which one hind 
of wealth can he exchanged for another. 

Let the two functions of money be carefully observed. 

First, Money establishes a universal Standard of Value. 

Second, Money is a Medium for the exchange of Values. 

In its first-named function, as a means of ascertaining 
the relative value of different commodities, money per- 
forms an office precisely like that of a pound-weight, or a 
yard-stick or a gallon-measure. As each of these is ad- 
justed to be a standard measure of a certain quality, one 
of weight, another of length, and another of capacity, so 
the money-dollar is adjusted to be a standard measure of 
the quality called value. Whatever is thus used for the 



MONET A STANDAED OF VALUE. 285 

measurement of a quality must itself possess tlie quality in 
question. You cannot weigh a piece of meat with a ray 
of moonlight, nor get the length of a piece of cloth by 
means of a drop of quicksilver, nor measure a gallon of 
alcohol with the edge of a knife-blade. No more can you 
define the value of these or any other objects by unreal 
notions or shadowy symbols. Only a tiling of value can 
measure value. 

According to our definition, value may be resolved into 
two elements, viz., utility or desirableness, and cost, the 
exponent of labor. Whatever substance then, is used as 
money, must be capable, in some way, of ministering to 
men's gratification, so that it shall be generally desired, 
and the nearer it comes to being always and everyiohere 
desired, the better is it fitted for its purpose as money. It 
must be also a substance which can he obtained only hy 
labor, and the more uniform the amount of labor found 
necessary to obtain it, the better is it fitted for its purpose 
as money. These elements must be combined, neither is 
sufficient of itself to form value. Nothing in the world is 
more useful than the air we breathe. All men desire it ; 
without it they die. But it has no value. You cannot 
bring it into the market as an article of exchange, because 
it is furnished freely to all, without labor — it costs noth- 
ing. So too, there may be exhibited to you the result of 
weeks and months of labor on the part of one who tried to 
make a flying machine. After all is done, the thing has 
no beauty to cause it to be desired. There is no want of 
man which it can possibly be made to gratify. It has cost 
a deal of labor, but it has no value, for it can be put to no 
use whatever. The value of money therefore depends upon 
the combination of these two elements in the substance 
employed. Both are indispensable. Hence in our defini- 
tion, we say that the substance of money is " some useful 
product of labor. ^' 



286 • EXCHAN^GE. 

It is of the highest importance that any standard of 
measurement should be fixed ivitli exactness mid kept as 
invariahle as possible. When a standard unit of measure- 
ment for the material qualities of length, surface, volume 
and weight was to be determined for the French govern- 
ment, nearly a hundred years ago, the Academy of Sciences 
recommended that one ten millionth of the quadrant of a 
terrestrial meridian be taken. Seven years of great labor 
were occupied in ascertaining Avith nicest exactness the 
length of that linear base, called the Metre. By this, the 
unit of surface, the unit of volume, and the unit of weight 
were determined with equal care and the meti'ic system 
was made as nearly perfect as any human device can be. 
Nature furnishes us no such absolutely fixed and invaria- 
ble unit of value. But it certainly behooves men to select 
for their standard of value, the most stable and unaltera- - 
ble thing to be found in nature. All the ti'ansactions and 
contracts of trade depend upon precise determinations of 
the values involved. If the standard of measurement is 
variable, all these operations must be attended with uncer- 
tainty and confusion. Hence the importance of securing 
to money the utmost possible precision and stability of 
vahie. " All substitutes for it, all modes of economizing 
or facilitating its use, are equitable and legitimate only so 
far as they preserve its essential attributes of precision and 
unchangeableness." All things are exchanged with refer- 
ence dii-ectly or indirectly to their prices ; but price is 
value measured by money. Hence money, as a universal 
standard for the measurement of value, is an indispensable 
agent of commerce. 

Money in its second function, as a Medium of exchange, 
also performs a very essential service in the commerce of 
the world. The real object of all trade is to effect an in- 
terchange of commodities. The actual wants of men are 



MOITET A MEDIUM OP EXCHANGE. 287 

met only as every one, by parting with one article, may 
secure some other article which he needs. The difficulty 
of doing this directly has been already noticed. That 
difficulty is overcome by the intervention of Money, a third 
article, which all desire, partly for some intrinsic qualities 
which it possesses, but more for its adaptedness to just 
this function of a medium. By means of it, what cannot 
be effected by one exchange may be easily accomplished by 
two. The man can sell his table for money. The money 
is easily divided, and the baker, the butcher and the shoe- 
maker are quite ready for their respective portions of the 
money, to sell him the bread and meat and shoes which 
will satisfy his pressing wants. Through this medium, by 
two exchanges, the end is easily attained, which could not 
be attained by one exchange without vastly more of trouble 
and labor. This common medium must evidently be sovie 
embodiment of value, which one can safely receive for the 
commodity he wishes to part with, because he knows that 
it will be received -by others at the same valuation, for 
whatever he may wish to purchase, 

Tlie essential qualities of such a common medium of 
exchange, are three : 

Eirst, Precision and Stahility of value, the same qual- 
ity which we saw to be of highest consequence, for the 
first named function of money. 

Second, Universal Acceptahleness so that it will readily 
be received by everybody for whatever he has to dispose of. 

Third, Divisihility into parts, representing, without 
loss of value, different degrees of value, so as to furnish an 
exact equivalent of any required amount. 

We can conceive that one substance might be adopted 
as a standard of value, and another employed as a medium 
of exchange. Thus wheat might be selected as the standard 
to which every thing else should be referred, and certain 
beautiful African shells called cowries, having been first 



288 EXCHAT^GE. 

measured and marked by that standard, might be used as 
counters in the actual transfer of articles. But such an 
arrangement would involve many inconveniences. There 
would always be something arbitrary and uncertain in the 
adjustment of the two to each other, and the necessity of 
keeping in mind two objects, so different, would confuse 
and complicate all operations. Hence the necessity that 
the same substance should fulfill these two functions, and 
that it should combine the qualities necessary for both. 

This does not imply however, that money as a medium 
'must be actually used in every exchange that is made. 
When once a standard of value is defined, different com- 
modities can be measured by it, and then interchanged by 
being offset against each other according to their respect- 
ive values. Thus the farmer's wife brings her basket of 
eggs and her firkin of butter to the village grocer. In 
terms of money, she sets her price for these articles, and 
he in like manner, names his prices for the tea and sugar 
and spice she wants, and the trade is at once adjusted and 
consummated without any payment of money on either 
side. The same thing is going on all the time, on an im- 
mense scale, in the commerce between New York and 
Liverpool. By processes hereafter to be explained, ship- 
loads of wheat are balanced off against ship-loads of manu- 
factured goods, the values on either side amounting to 
millions of dollars, without the actual payment of any 
money. Thus through the function of money as a meas- 
ure of value, the greater part of the trade of the world 
becomes really exchange in hind. Yet this cannot be, 
except as there is money within reach to be used as a 
medium of exchange when an exigency demands its inter- 
position. In the last settlement, the balance must be paid 
in money, and at every step the reckoning is kept i?i money's 
worth. 

Since wealth is continued and increased only by 



ARTICLES USED AS MOXEY. 289 

repeated processes of consumption and reproduction, in- 
volvingan interminable succession of exchanges ; and since 
money is the constant medium of exchange, wealth of 
every kind must more or less frequently, for a longer or 
shorter time, appear in the form of money. Everytliing 
that has value will come at some time or other to have its 
price and he estimated in terms of money. This close iden- 
tification of all wealth with money, in whose form it some- 
times appears, has occasioned the mistake noticed in a 
previous part of this work, of resolving all wealth into 
money, so that money is regarded as the most desirable of 
all things to be brought into a country. The best correc- 
tion of this mistake comes from a clear apprehension of 
the true nature of money, as a simple insti'ument of ex- 
change, fulfilling its two important functions ; itself form- 
ing but a very small part of the world's wealth and capable 
of increasing wealth only indirectly, as it facilitates those 
multifarious exchanges which carry every kind of wealth 
where it is most needed to satisfy the wants of men. 

Any article ivhich has value may he made to perform 
the functions of money. Thus by different nations and in 
different ages of the world, various articles have been em- 
ployed. Among pastoral nations, cattle have been quite 
commonly employed as the chief instrument of exchange. 
Homer tells us that the armor of Diomede cost nine oxen. ' 
So the wealth of the patriarch Job is estimated by 
the number of his sheep and camels and oxen and asses. 
Hence, probably, arose the custom among the G-reeks and 
Romans of stamping their earliest coin with the figure of 
an ox or sheep. Thus the Latin word for money, pecunia 
is supposed to be derived from pecus, cattle. In ancient 
Syracuse and Britain, money was made of tin, in Sparta of 
iron. We find used for the same purpose, a preparation 
of leather among the Carthaginians, platinum in Russia, 
13 



290 EXCHANGE. 

lead in Burmali, nails in Scotland, pieces of silk among the 
Chinese, cubes of pressed tea in Tartary, salt in Abyssinia, 
cowrie shells on the coast of Africa, slaves among the 
Anglo-Saxons, tobacco in Virginia, codfish in Newfoundf- 
land, bullets and wampum in the early history of Massa- 
chusetts, logwood in Campeachy, sugar in the West-Indies, 
soap in Mexico. But from the time of Abraham, when he 
paid (G-en. xxiii : 16) to the children of Heth " three hun- 
dred shekels of silver, current monei/ loith the merchant " 
— the earliest record of a purchase with money — till now, 
gold and silver have been employed as the money of the 
vrorld with civilized and commercial people. In most of 
the cases mentioned, when other articles were employed, 
the standard of value was recognized as set by the precious 
metals, and on account of the scarcity of these metals, the 
other things named were used as a medium of exchange. 
Thus the w'ampum and bullets of Massachusetts, the 
tobacco of Virginia and the sugar of the West Indies, 
passed from hand to hand, to effect particular exchanges, 
with a commercial value, more or less distinctly recognized 
in terms of silver or gold. It should be noted that when 
anything that has been used as money is devoted to any 
other use, its functions as money cease. Gold coin turned 
into gold plate, just as really as tobacco or sugar passed to 
a consumer, is no longer money. 

Whatever Substance is used as Money must 
be Universally desired as such. — Its object is to 
facilitate exchanges, but it can accomplish this object only 
by means of the willingness of the whole community to 
exchange for it everything which they are willing to part 
with. If one individual of a community prefers one sub- 
stance, and another individual another, exchanges will be 
embarrassed by unnecessary complication, and by the use- 
less consumption of time. And if on the other hand, any 



NECESSARY QUALITIES OF MONET. 291 

substance is tlius universally desired, on account of the 
great facilities which it offers, and the great saving of 
labor which it effects, it will be immediately used for this 
purpose. And it will be so used without any agency of 
government, and even though a government did not exist, 
just as a man will use any other instrument for increasing 
the productiveness of his labor as soon as he can procure 
it, simply for the reason that it is for his advantage. 

If the exchanges of a country were wholly internal, it 
would be suflScient that such a medium were universally 
acceptable in that country alone. But, inasmuch as every 
nation has important and extensive exchanges with other 
nations, it is an additional advantage to have the same 
substance used as a medium of exchange. That exchange 
is the most profitable for a country, in which it exports 
what is relatively most abundant at home, and imports 
that which is relatively most wanted at home ; and imports 
it from that country in which, what it exports is most 
wanted, and what it imports is most abundant. Now it is 
evident that money may be accumulated in any country, 
so that it shall be relatively lower in value than other com- 
modities. Thus, the precious metals may be so abundant 
in this country, that a merchant can procure more iron in 
Eussia by sending a given amount of gold, than by send- 
ing the flour which would here be equal in value to the 
gold. It is therefore for his advantage to send the gold, 
and it is equally for the advantage of his country. And 
for the same reason, if in this country there is a relative 
scarcity, it will be for the advantage of other nations, as 
well as for our advantage, that they should send gold or 
silver in exchange for our products. In this manner, ex- 
changes are made, of that which is least wanted by both 
parties, for that which is most wanted by both. This 
enables both parties to supply themselves at the lowest 
rates. 



292 ECXHAIfGE. 

/ 

Besides, it is very desirable that the value of money he 
as little as possible liable to fluctuation^ Now if the same 
substances are used in all the civilized world, this fluctua- 
tion, if not absolutely prevented, will be so restricted, as 
to produce the least possible amount of evil. When ex- 
changes between countries are frequent and numerous, 
and the prices of all commodities are universally known 
by the merchants of both, as specie may be sent abroad 
with very little cost of transportation, a very slight advance 
in its relative value will cause it to flow in from other 
countries, and a very slight surplus will cause it to flow to 
other countries, until the common equilibrium is restored. 
In this, we see in what manner the universal employment 
of the same substances, by all nations holding intercourse 
with each other, will be an advantage to all ; inasmuch as 
it will prevent any great fluctuation in their relative value 
in any particular country. 

The adoption by a community or state of a kind of 
money which is not acceptable in other countries, neces- 
sarily excludes that people in great measure from the com- 
merce of the world. Thus in ancient Sparta, in order to 
maintain the policy of isolation which ruled the state, and 
to restrict all foreign commerce, it was enacted that the 
money of the state should be of iron alone. This measure 
had the effect to repress trade, but it also made the Spar- 
tans the most venal and corrupt of all the peoples of 
Greece. For the free and prosperous commerce of civil- 
ized nations, it is of the highest importance that the stand- 
ard of value and medium of exchange adopted by them be 
uniform. The circulation in a country of an irredeema- 
ble paper money, or the adoption of a standard of specie, 
at variance with that in use among other commercial 
nations, must inevitably impede the trade and impair the 
industry of that country. 



QUALITIES OF GOLD AND SILVER. 293 

V The special adaptedness of Gold and Silver 
for the functions of money is due to certain qualities 
which are found peculiarly combined in these metals.' 
These qualities should be specifically noticed. 

1. Gold and silver are intrinsically desirable. Their 
brilliancy, their malleability, their resistance of corrosion 
and their permanence fit them especially for ornaments 
for the person, for plate and for the manifold decoration 
of temples, houses and equipages. Articles made of these 
materials or adorned by them have an intrinsic beauty 
which gratifies the taste of men universally. They are 
desired by rude and cultivated people alike. This taste, 
which has been uniform and enduring through the ages, is 
not likely ever to change or pass away. We have reason 
to believe that those which are fitly called the ^precious 
metals will always be sought after for these and other 
more substantial uses to which they may be applied. Their 
further use as money only enhances and makes more con- 
stant and steady their general desirableness. 

2. These metals are oMainahle only hy lalor ; and the 
amount of labor necessary to obtain them is more invariable 
than that which pertains to other substaiices. Occasionally 
in California or in Australia, one may have chanced sud- 
denly to find a nugget of pure gold, but ordinarily, gold 
and silver are obtained as the fruit of labor in long and 
patient search, washing sands, breaking rocks, reducing 
ores and separating the metal from other substances with 
which in nature it is associated or combined. The amount 
produced is directly and immediately dependent on the 
labor employed. Twice in the history of the world, viz., 
on the first discovery of America, and on the unfolding of 
the mineral treasures of California, Australia and the 
Eocky Mountains, there was a sudden increase of the 
amount of these metals in the world's market. But in 
both cases, this increase of the material of money was fol- 



294 EXCHAKGE. 

lowed very closely by an expansion of the commerce of the 
world which caused a corresponding increase in the demand 
for money, so that the equilibrium between supply and 
demand was but slightly disturbed. 

As we have seen, the two elements of value are desira- 
hleness, and cost msasured ty the labor necessary to obtain a 
given object. In respect to both these elements, gold and 
silver are permanent and uniform beyond any other pro- 
ducts of human labor. Hence their value is less fluctua- 
ting, more stable than that of anything else, and therefore 
they are best adapted to fulfill the functions of money. 

3. These metals concentrate within a small bulk a large 
amount of value. In the use of them as the instrument of 
exchange, much labor of transportation is saved. They 
are conveniently portable. A man may easily carry in his 
pocket, the value of a wagon -load of wheat, or a car-load 
of cattle, when put into the form of gold. At the same 
time, their value is not too much concentrated as is the 
case with diamonds. 

' 4. These substances are capable of minute Division 
without loss of value. This is a quality essential for facili- 
tating all sorts of exchanges. A gold eagle or a silver dol- 
lar may be divided into ten equal parts and each piece will 
have the value of just one- tenth of the original coin ; the 
value of all the pieces together will be equal to the value 
of the one whole piece. A large diamond is worth several 
times its weight of small diamonds, and once broken into 
pieces, its original value can never be restored. 

b.\These metals are of uniform Quality. \ Gold and 
silver pure are always and everywhere the same. At the 
same time they may be readily alloyed that they may 
be rendered harder and so better adapted to use as money. 
But they can easily be refined and restored to their origi- 
nal purity without loss. 

6. These substances are of such a nature that their value 



QUALITIES OF GOLD AND SILVEE. 295 

can ie easily verified. They are malleable, easily wrought 
into any shape, and capable of receiving and retaining a 
distinct impression. Their brilliant lustre, their uniform 
weight and their resistance to the action of acids, make it 
easy to distinguish them and to detect adulteration. 

7.i These metals are nearly Indestructible hy accident or 
use. No ordinary fire consumes them. They are not de- 
composed by atmospheric influences. They wear away 
Yery slowly. "It has been ascertained, from data care- 
fully obtained in the bank of England, that gold in coin 
loses only 4.16 per cent in one hundred years, or about one 
per cent in twenty-five years." 

8! These tioo metals are adapted to each other, for the 
different exchanges, large and small, which the trade of civ- 
ilized countries requires. \ If gold should be so minutely 
divided as to represent very small values, the pieces would 
be counted with difficulty, and easily lost. If silver alone 
were used for aJl exchanges, its great bulk, when large 
values were represented, would involve much inconve- 
nience. It is a great advantage to have the two metals, to 
be used as money, the one for large, and the other for 
small values. If each has its natural sphere defined, and 
is held to its own peculiar function, the slight variations 
in their relative value, which from time to time occur, will 
work no sei'ious evil. 

It is because gold and silver possess these essential 
qualities for the functions of money, that they have been 
so long and so universally employed as the money of the 
world. We use them as an instrument of exchange, not 
because they bear a certain stamp, nor because government 
has made them a legal tender, but because we know that 
they represent a given amount of value, and that therefore 
we can exchange them for the same amount of value when- 
ever we please. In the strictest sense, the only Real 
money consists of these precious metals in the form of coin 



396 EXCHANGE. 

stamped and issued by government authority. The various 
representatives and substitutes for this which are employed, 
are properly embraced in the broader term currency, and 
will be noticed in treating of credit. 

The views given of the nature and functions of money 
establish certain truths which are worthy of distinct state- 
ment. 

1. Since cost of production is the basis of value, in 
every exchange the cost of the money employed is to he 
regarded as equal to the cost of the article for lohich it is 
exchanged. If a barrel of flour in Lima is exchanged for 
ten dollars, the cost of producing the flour and of trans- 
porting it to Lima is equal to the cost of producing the 
silver and transporting it. Mr. McCulloch says, " What- 
ever may be the advantages attending the use of coined 
money, its introduction does not affect the nature of ex- 
changes. Equivalents are still given for equivalents. The 
exchange of a quarter of corn for an ouuce of pure unfasli- 
ioned gold bullion is undeniably as much a real barter as 
if it had been exchanged for an ox or a barrel of beer. 
But supposing the metal to have been formed into a coin, 
that circumstance, it is plain, could have made no change 
in the barter. A coin is merely a piece of metal of known 
weight and fineness ; and the commodities exchanged for 
it are always held to be of equal value." 

2. The general use by all nations of the same hind of 
money as the instrument of exchange, and the universal 
freedom of commerce everywhere must serve to equalize any 
variations in the cost or in the supply of money. \ The 
opening of new and richer mines, or the use of improved 
means for extracting the metals, may cheapen money. 
The value of money, like that of any other commodity, is 
also affected in short periods by fluctuations of supply and 
demand. ,But the commerce of the tvorld is the great reser- 



PKOPORTION OF MO^STET TO AMOUNT OF TRADE. 297 

voir, the ocean encompassing the globe, into which all con- 
tributing streams of money flow, and Us level is essentially 
the same everyivhere, varied only by considerable lapses of 
time. If there is more money in a country than is needed 
for its exchanges, the price of goods is raised and it is sent 
abroad for new purchases. If there is a scarcity of money 
in a country, the price of goods declines and money comes 
in from other lands to be exchanged for them. Thns by 
a law as simple and constant as that of the tides, the 
money-market regulates itself, provided only trade is free 
and money is real and the same everywhere. 

3. The amount of money in any one country and in all 
countries is very small in proportion to the lohole amount 
of wealth and of values exchanged. As a standard of value 
money may be said to regulate all exchanges. As a medium 
of transfer, it is actually employed in comparatively few, 
and performs its office with great rapidity. By the simple 
process of keeping accounts, which are occasionally bal- 
anced, a little money suffices for the exchanges of any 
community. By like means, in yet greater degree, are the 
large operations of trade between different nations, con- 
ducted without the transportation of much money. It 
flows from one country to another only in the process of 
equalization just spoken of. So far as it is employed in a 
particular community, the same money may be used ten 
times or more in a day, each time fulfilling its purpose. 
In general, the more freely it flows, the more rapidly it 
passes from hand to hand, the better for the prosperity of 
business. 

^ 4. Afi increase of the amount of money in a country is 
of^no advantage unless it is demanded by an increase of 
production and of active trade. \ It must be remembered 
that money is only an instruinent or a machine like a 
plough or a power-loom. It is of no advantage to a com- 
munity to have a hundred ploughs when only fifty can be 
13< 



298 EXCHAIirGE. 

tised, or forty looms when twenty will do all the work. 
So, if one million dollars serves all the purposes of exchange 
in a city, to double the amount of money will bring no 
benefit. If it is a city isolated from the rest of the world, 
such an increase will merely double prices, that is, twice 
as much money will be used in every exchange. If its 
trade with other places is free, the superfluous money will 
float away on the tide of commerce to some point where it 
is needed, just as a surplus of wheat or cotton goods or 
any other commodity must do. 

5. The dbu7idance or scarcity of money in a country is 
not of itself a trustworthy index of prosperity. "We need 
to look back of the fact to its cause. If money is abundant 
because business is stagnant and exchanges are few, it is a 
sign of adversity rather than of prosperity. If a scarcity 
of money is caused by an increase of products and great 
activity of trade, it indicates a prosperous condition. In 
countries containing rich mines of the precious metals, 
money or the material for money becomes a product of 
regular industry, and its abundance is a favorable sign. In 
another country money may be very scarce, because from 
its scanty resources or on account of the degradation of its 
people, little is produced which can be exported to bring 
money in exchange. In this case the scarcity of money is 
a sign of poverty. 

6. ■ The oft-repeated maxim, " It matters not what he- 
comes of property, so long as the money is in the cou7itry," 
is false and mischievous. ) The great fire of 1872, in Chi- 
cago, within thirty-six hours, consumed property valued 
at about two hundred million dollars. But the vaults 
and safes of the banks protected the money of the city so 
that at most, a few thousand dollars would cover all that 
was lost in that form. Did the fact that the money was 
saved compensate in the least for that wasteful destruc- 
tion of every other kind of wealth ? Contributions from 



AGENCY OF GOVERNMENT. 299 

all parts of the world provided immediate necessities for 
the relief of suffering. With means obtained largely by 
credit, the city was rapidly rebuilt. The pressure of the 
burden of loss was thus eased and postponed for a time. 
But at length by the embarrassments and failures of 1876-7, 
the people of that city and many in other parts of the 
country were made to understand that it does matter what 
becomes of the property of a country. Labor and capital 
valued at a million dollars may have been expended inset- 
ting up a great manufactory which has proved an utter 
failure. So much property is thereby lost. Are not those 
who so invested their capital and the whole community so 
much poorer for that useless outlay ? Does the fact that 
the money paid out in erecting and putting up the estab- 
lishment is still circulating among the people change the 
essential feature of a dead loss ? That money was but the 
instrument by which so much wealth was thrown away ; 
whatever other purposes it may serve, it cannot now bring 
back to the owners what they have lost. If a thief in the 
night had emptied your store- house with a wheel-barrow, 
you could not easily be convinced that it made no differ- 
ence, you were no poorer, since he had left the wheelbar- 
row behind. 

' It is the complications of credit with money, hereafter 
to be considered, which mystify most minds on this sub- 
ject and really produce a great part of the apparent varia- 
tions in the value of money, in different countries and at 
different epochs. 

The Agency of Government with respect to 
Money. — Men use money in exchanges, for the same 
reason that they use hammers for the purpose of driving 
nails, because they find that they thus save time and labor. 

Had governments no agency at all in the matter, the 
precious metals, as an instrument of exchange, might have 



300 EXCHANGE, 

been both introduced, and universally employed ; and they 
would have been so introduced and employed, as they act- 
ually were in the time of Abraham. ^ Hence, as we have 
before remarked, these metals derive their use as money 
from their inherent fitness, and the desire of men so to 
employ them, and not from any agency of government. 
( While, however, this is the case, and while this is always 
to be borne in mind, there is yet some agency, which 
society, or government, which is its agent, may exert, that 
shall increase the convenience of whatever may be used 
as money. 

This agency has reference to two objects. 
First, Whenever any substance has been found univer- 
sally adapted for the purposes of exchange, it is important 
that it should be used by all men, unless something to the 
contrary be specified by particular contract.. If I owe a 
man for a hat, and when I come to pay him^ he demands 
payment, not in silver, but in beaver skins, I may not be 
able to procure them and he may hold me his debtor and 
deal with me accordingly. If, instead of paying him in 
silver, I offer him leather, and declare that I will pay him 
nothing else, he will be defrauded out of his due. Now, 
to prevent disputes without end, it is desirable that some- 
thing be fixed upon, the tender of which shall discharge 
forever the debtor's obligation. And as this would most 
naturally and most justly be the substance which all men 
accept as money, this is most properly chosen. - Hence, 
society or government has a right to establkli the precious 
metals as a Legal Tender ; that is, to enact that if a man 
declares that I owe him ten dollars, and I offer him ten 
silver dollars, if he chooses not to receive them, I am 
under no obligation to give myself any more trouble about 
it. The tender, on my part, is a full release. I am under 
no obligation to offer anything else ; and he has no right 
to demand anything else. Nor is there in this any oppres- 



COINAGE. 301 

sion. If a man wishes to be paid in something besides 
money, he can always specify it in the contract, and thus 
his object can be accomplished. |The whole effect of such 
a law is to prevent disputes, and to enact what shall be a 
full and valid release from obligation, when nothing spe- 
cific has been agreed upon. 

Second, The utility of whatever is used as money 
will be greatly increased by its careful preparation for its 
purpose. This is accomplished by the process called 
coining. ] 

It is evident that the preparation of coin for the public 
use could never be safely entrusted to individuals. The 
temptations to dishonesty are too great for ordinary human 
virtue. Such a work should be executed by those, whose 
interest would lead them to perform it with the greatest 
possible fidelity. Hence, in all civilized countries, indi- 
viduals have surrendered the right of coining money to 
the government, to be exercised by agents appointed for 
that purpose. These agents should be men of science and 
skill, acting in such circumstances that their interest will 
be strongly on the side of honesty, and under such super- 
vision that any failure of either skill or integrity can be 
easily detected. 

In coining the precious metals to make them money, 
the government must have regard to the convenience of the 
public in three particulars, viz., the Quality of the coin, 
its Size and its Form. 

1. Tlie metal of tJie coinage must he of uniform purity. 
Were it otherwise, every piece must be tested by chemical 
analysis. Since money is liable to loss from wear, and 
since it is very difficult to bring the precious metals to a 
condition of absolute purity, it is found of advantage to 
mingle some portion of alloy with the metal as it is pre- 
pared for coining. This renders the metal harder, and 
makes it feasible to set the standard of purity at an exact 



303 EXCHANGE. 

point. The degree of this adulteration should, however, 
be fixed by law, making it invariable and publicly known. 
/ 2. The coins must be of Sizes most convenient for the 
jniiyoses of exchange. If made too large, they cannot well 
be carried about ; if too small, they are easily lost and in- 
volve much time and trouble in counting. Hence, the 
advantage of using two or three different metals, gold for 
the higher values, silver for a lower grade, and copper for 
the lowest of all. The relative proportion of the pieces to 
each other should be adjusted so that all can be conve- 
niently enumerated. On this account, the decimal system 
adopted in the United States and in France is probably 
preferable to any other. The size once fixed upon should, 
remain invariable. 

\^ 3. The coins should hear such Forms that each piece shall 
indicate distinctly its value. If any portion of the metal 
has been feloniously abstracted, the fact should appear in 
a change of form. For convenience in counting and pil- 
ing, flat coins are preferable. To present the least surface 
to friction, some thickness is desirable. The surface needs 
to bear some variety of impression, so that if the metal 
is filed or worn away, it may be apparent ; the same pur- 
pose is subserved by milling the edges. The effect of 
friction is further obviated by raising a rim on the edge of 
the coin. It would be of advantage also, if the amount of 
pure metal in every piece were stamped upon its face, so as 
to give assurance that the quality of the coin is unimpaired. 

( The true office of the government in this business of 
coining money is simply to promote the convenience of the 
public by verifying and giving definite form to that which 
is the world's chosen standard of value and medium of ex- 
change. In principle, it is precisely the same thing which 
it does in establishing standard measures of length, sur- 
face, weight and capacity. Its action in the two cases 
differs only in this, that with respect to the other meas- 



COINAGE. 303 

nres, it can safely leave anybody to manufacture the instru- 
ments to be used, if they will but bring them to be veri- 
fied by comparison with its established standard ; but in 
the case of money, there is a special liability to fraud and 
deception, which is best obviated by the government pre- 
paring, under its own authority and supervision, the instru- 
ments which are to be used in measuring values. 

Since the manufacture of coins requires considerable 
labor with expensive machinery, and since the metal coined 
has additional value from the means of verification con- 
ferred upon it, which inures to the benefit of the owner, it 
is right that the oioner should pay for the service ren- 
dered. It is common therefore, when a person brings bull- 
ion to the mint to be coined, for the government to require 
a small payment for the operation. This charge is techni- 
cally called Seignorage. It should be no more than just 
sufficient to defray the expenses of the work, otherwise 
private individuals will be tempted to undertake the busi- 
ness for gain. The machinery and processes for coining 
under the direction of the government are now brought to 

. such perfection, that the actual expense is very trifling. 

( It is computed to amount to only one-fifth of one per cent 
for gold coins, and this is now the rate charged by the 
•IJnited States government. ■ 

{, In continual use, coin becomes worn so that its impres- 
sion is effaced and its value is diminished, i When thus 
unfitted for circulation, it is but fair that the government 
should make arrangements under certain limitations, to 
repair the loss at its own expense. It would not be right 
that the entire loss should fall on the last holder. [Accord- 
ingly, by law, gold coins of the United States are receiva- 
ble at the treasury, at their denominational value, when 
not reduced in weight, after a circulation of twenty years, 
as shown by the date of coinage, more than one half of one 
per centum."^ 



304 EXCHAKGE. 

The government must also have some authority to con- 
trol the circulation, within its own territory, of foreign coins. 
Otherwise, worn and depreciated coin of other countries 
may come in and drive out its own superior money. Some 
years ago, our country was flooded with Spanish and 
Mexican silver coins greatly worn, which caused our own 
better coin to disappear. The evil was relieved by an act 
ordering that the foreign pieces should be received only at 
a discount of twenty per cent on their face value, though 
they had really lost only ten per cent. The old coins were 
•iijamediately collected and melted up. 

\^ In the operations of international commerce hitherto, 
great inconvenience has been caused by the heterogeneous 
character of the monetary systems of different countries^ in- 
volving troublesome fractional operations in reducing the 
coinage of one country to that of another. This matter has 
attracted much attention of late, and earnest attempts 
have been made to bring the civilized nations of the world 
to adopt a system of correlated international coinage. 
This would require only that each nation should adjust its 
coinage to the same gold standard, determine the units of 
its system so that they shall all possess simple numerical 
relations, as to weight, with the gramme, the metric unit 
of weight, and give a decimal character to the standard of 
purity, that is, to make the coins of nine parts pure metal, 
(gold or silver as the case may be) and one part alloy. A 
slight change in the systems of the leading commercial 
nations would secure this uniformity, and we trust at no 
distant day, it will be accomplished. If with this change, 
there could also be more fully adopted a uniform system 
of weights and measures, the exchanges of the world 
would be greatly facilitated. 

The legitimate agency of government with respect to 
money extends not much beyond the action we have con- 
sidered. \ Laws forMdding the exfortation or importation 



QUESTION OF DOUBLE STANDARD. 305 

of money are unjust and mi&cMevous. Money, like any- 
other commodity, if let alone, will regulate itself. It will 
be sent abroad or brought into a country, just as will be 
most for the common advantage. Such restrictions inter- 
fere with individual property-rights. A man has the same 
right over the money he may possess, that he has over his 
cotton or wheat, or any thing else, that is, a right to ex- 
change either with any one or for anything on which the 
parties may agree, as may seem for his advantage. 
'ir i There may be occasion for a government, at times, to 
alter the value of its coinage. ) But this ought never to be 
done arbitrarily, nor for the advantage of the government 
itself, nor of any class or party, but solely to subserve the 
public convenience or advantage. Such changes neces- 
sarily interfere with private contracts and in the relation 
of creditors or debtors, wrong one side or the other. 
These interests, therefore, should be carefully protected in 
any acts changing the value of money. 

For the same reason, it is obvious that nothing but ex- 
treme necessity involving the very existence of the nation 
can warrant a government in making anything hut gold 
and silver a legal tender. In such an exceptional case, 
when the exigency is passed, sound policy demands that 
the general finances of the country be restored to the basis 
of real money, with as little delay and with as little shock 
as possible. 

The question of a Double Standard. — We have 
seen that the use of both gold and silver as money, for 
convenience in the adjustment of exchanges where different 
degrees of value are concerned, is highly advantageous, 
almost indispensable. Should the standard of value be 
defined in terms of each metal and both be made legal 
tender to an unlimited extent ? This is a distinct ques- 
tion, and one of no little importance. 



306 EXCHANGE. 

As these pages are passing through the press, our coun- 
try is much agitated about a proposed law for the " re- 
inionetizaUon of silver, designed to withdraw existing 
restrictions on the coinage of that metal and to make sil- 
ver coin an unlimited legal tender. It will not be perti- 
nent here, to discuss this as a political measure, complica- 
ted with past acts of Congress on the subject, and with 
the difficult problem of a return to specie payments after 
large issues of a paper currency which the law has made a 
legal tender for several years. Two or three phases of the 
matter may, however, be properly noticed in the light of 
principles already defined. 

However it may be accounted for, the fact is that the 
value of our smaller silver coins now stands at about 
eight per cent below the standard of gold. \ Even the 
trade-dollar, so much called for, though it contains a 
larger proportion of pure metal, is still four per cent 
inferior to gold. Silver has been legally for four years, 
practically for forty years a tender only for small amounts.^ 
In these circumstances, as its first effect, the proposed 
measure would simply warrant the payment of the debts 
of the government, and of all private debts with a depre- 
ciated money. So far, it impairs existing contracts and 
works a wrong of the same kind with that involved in the 
action of kings of the middle ages when they debased the 
coin of the realm. Seen in its true light, the measure in- 
volves this. It says to every debtor, as did the defaulting 
steward of Christ's parable, "Sit down quickly and take 
thy bill and write ninety-two for every hundred." In this 
aspect, the measure is unjust and conflicts with the funda- 
mental principles of our science. Is the necessity of the 
case so extreme as to justify it ? 

Besides, it is a law as fixed as the law of gravitation, 
that when two kinds of money of different valuation are 
thrown together without limitation, into the trade of a 



OBJECTIONS TO A DOUBLE STANDARD. 307 

country, the more valuable, as the heavier, will sink and 
disappear, leaving only the lighter to float on the surface 
of current exchange. Thus the requisition that silver coin 
shall pass, under no restriction, at the same nominal rate 
with gold coin, which has a superior value, must inevitably 
drive out the tetter money and leave the country with only 
silver money. Silver must flow in from everywhere to 
displace the gold we now have. For in most of the civil- 
ized nations with which our people have commerce, silver 
is by law, or by established usage which has the force of 
law, employed only as a subsidiary coinage for exchanges 
of limited value. The effect of the measure would thus 
be to bring into universal use in our country, a money 
which is not generally acceptable to other nations, and so 
to throw our industry out of relation to the commerce of 
the world, except at a disadvantage. 

■ y Furthermore, we have seen that it is of the highest 
Importance that the standard of value be as invariable as 
possible. Gold and silver are both liable to some fluctua- 
tions as the cost of their production varies, but experience 
has shown that of the two, gold is the more stable and 
hence preferable for the standard. , The attempt to unite 
the two in a double standard involves the special difficulty 
of determining and maintaining the relative values of the 
two metals. But the ratio of these two values is very in- 
constant. However carefully adjusted at one time, it 
is impossible to keep it fixed. As soon as any material 
difference appears, the cheaper will be chosen for the pay- 
ment of obligations, and the dearer will be transferred to 
other countries or melted up because it has a higher value 
as bullion than as coin. Hence the necessity of frequent 
interferences of the government with the money of a 
country, to the disturbance of its true functions. 

/ These fluctuations might be relieved in part, if aM 
countries luere to adopt the double standard. Then money 



308 EXCHANGE. 

of either kind, being acceptable everywhere, whichever 
was in excess in one country, might find its way to some 
other country where there might be a deficiency. Even 
then, however, there would be a necessity, from time to 
time, for some kind of a congress of nations to determine 
the relative value of these metals. For one country by 
itself to adopt the double standard without qualifications, 
must inevitably work to its disadvantage, by embarrassing 
the movements of exchange with other parts of the world. 
The employment of silver as a subsidiary coin, making 
it a legal tender in exchanges within defined limits of 
value, involves no such evils and secures in the highest 
degree, the advantages of the two metals, as each hecomes 
the complement of the other, each fulfilling its function as 
money, in a sphere to which the other is not adapted. 



CHAPTER XXI. 

CEEDIT AS AN INSTEUMENT OF EXCHANGE. 

The Nature of Credit.^ — In its generic sense, Credit 
is Eeliatice on the truthfulness and integrity of one's fel- 
low-men. Some exercise of it is essential to the Very exist- 
ence of society. With the advance of civilizatioii it works 
naturally and necessarily into all the mutual relations of 
mankind, and especially into their business intercourse. 
According to its extent and the soundness of its basis, it 
becomes a sign of the social condition and character of a 
people. It marks the chief distinction between civilized 
and savage life. 

The simplest services cannot be interchanged without 
credit. If you hire a laborer to do a day's work, you must 
trust him as one able and faithful to do what you wish, 
and he must trust you for his pay until the end of the 
day. When you take your horse to the blacksmith to be 
shod, you commit your property to his charge, confident 
that he will not abuse the animal, and he lays out his labor 
and skill, assured that you will not drive off with the bene- 
fit of his work without making due compensation. The 
merchant puts his goods into your hands, believing that 
you will hand him in return, the money which is their 
price. So in every kind of transaction between man and 
man, there is an interval, it may be a minute, it may be a 
year, it may be a term of years, during which trust on one 
or both sides must be exercised. 
(^ As a technical term of Political Economy, Credit is 



310 EXCHANGE. 

Trust in the promise of an equivalent to he rendered at a 
future time for values immediately transferred. \ in tlie 
machinery of Exchange, credit is thus a substitute for 
money, with which it is more or less combined in all oper- 
ations, exerting a mighty power for good or evil. It is 
the chief cause of the fluctuations of trade, j As an instru- 
ment of exchange, it is indispensable and yet it must be 
regarded as a dangerous instrument, needing to be used 
always with some precaution. 

i' In further treating the subject, we shall present, first 
the Forms of credit, second the useful Fu7ictions of credit, 
and third, the mischievous Abuses of credit. The suc- 
ceeding chapter will be occupied with Banks as the Agents 
of credit. , 

The leading Forms in which credit enters into the 
operations of Exchange are 

1. Book-Accounts. A seller extends credit to a buyer 
for such time as they may agree that the account shall 
run. The butcher wants the baker's bread and the baker 
wants the butcher's meat. Each makes his morning pur- 
chase of the other to be charged in account. On the day 
of settlement, the balance is struck and the deficiency, on 
whichever side it may be, is paid in money, or carried to 
new account. So a farmer may anticipate the returns of 
his harvest by a running account at the store. In this 
case, the promise is implied in the direction to make each 
charge. 

I 2, Loans. A lender gives credit to the borrower on 
the strength of his formal promise, generally written, to 
pay at a definite time in the future with interest, the 
money now advanced. \ Thus a farmer may have a surplus 
of products not needed for his own use. These he turns 
into money and lends it to the blacksmith for the purchase 
of tools and materials to set him up in business, trusting 



FOKMS OP CREDIT. 311 

in his ability to refund him from the products of his work. 
The promise may be sustained by security pledged, as a 
chattel-mortgage or a mortgage on real estate. 
[ 3. Mercantile Paper., Goods are transferred from a 
riiauufacturer or an importer to a jobber, or from a job- 
ber to a retailer, to be paid for after thirty, sixty or ninety 
days, out of the avails of a second sale. In this case, the 
promise takes the form of a negotiable note, and the 
extent of the credit will be limited by the character and 
ability of the buyer. This paper may be and often is 
passed to other hands, according to the exigencies of the 
holder, and thus, to a limited extent, it floats in the com- 
munity as a marketable article, subject to the regular 
dealings of brokers and money-lenders. 

4.! Bank-deposits. The depositor gives his banker 
credit for money put into his hands, to be paid on his order, 
and accepts a certificate or an entry in his bank-book, as 
the promise, the voucher for the transaction. The orders 
by which these deposits are drawn out are called checks, 
by means of which, credit in this form, may float about 
with a limited circulation, at home ; and as the basis of 
bills of exchange, hereafter to be more fully explained, 
credit may thus reach round the globe, performing a very 
important part in the exchanges of individuals and of 
nations. 

5. Stocks. A number of individuals may enter into 
association, combining their capital for banking, manufac- 
turing, building a railway or any other business. Each 
gives credit to the association for the capital he puts in 
and accepts a certificate of stock as the promise or voucher 
of the association, i His trust is in the honesty and skill 
of the officers and directors to make the business safe and 
profitable. These stock-certificates, being transferable, 
may pass into other hands or be thrown upon the market, 
at the will of the holder. Thus credit may become itself 



812 EXCHANGE. 

an article of merchandise with a current price^ determined 
by the public estimate of its safety, or expectation of its 
profitableness, which will fluctuate under the influence of 
various causes, natural and artificial. 

6. Bonds issued by corporations, cities, states and 
nations. Whoever receives and holds these for money 
paid gives credit to the body corporate or politic, whose 
promise is embodied in the bond. Their value is estima- 
ted by the degree in which they command the public con- 
fidence, and they bear a price accordingly. These, like 
stocks, are made articles of merchandise in a regular and 
legitimate trade. They are sought by many for the in- 
vestment of money, because they combine the advantages 
of known security, long time and ease of transfer. When 
however, for any reason, they become uncertain or unsta- 
ble, they are made the sport of wild and reckless specula- 
tion. In such cases, credit furnishes the instruments for 
stock- gamblers to play with. 

7. . Promissory Notes issued by banks or governments,,,^^ 
and designed to pass from hand to hand as Currency, j 
The public, receiving and using these, gives credit to the 
banks or governments, and confidence rises or falls with 
all causes which affect the ability or the stability of the 
promissor. , We include here, all tlie forms ot paper money 
— the purely Credit currency, like our greenbacks, where 
the promise rests on the simple wording of the paper — 
Mixed currency, like that of the old state-banks and of 
our present national bank notes, where the promise is sus- 
tained by a quota, great or small, of bullion or by govern- 
ment bonds, held for its fulfillment — and Mercantile 
currency, as it is sometimes called, like the notes of the 
bank of Hamburg, where is kept in the vault of the bank 
a gold dollar for every paper-promise of a dollar in circu- 
lation.N These all involve credit, they differ only as 
respects the ground for trust, in actual resources for the 



FUNCTIONS OF CREDIT. 313 

fulfillment of the promise. In this form, credit flies every- 
where and attaches itself to every transaction of business ; 
safe and helpful, or liable, like a bubble, to sudden infla- 
tions and collapses, according as it is restricted and regu^ 
lated, or left to the freaks and fancies of men's fluctuating 
hopes and impulses. 

Under one or other of these heads, all the forms of 
credit in common use may be classed. The concise state- 
ment brings out both their distinctive and their common 
features. 

; In all cases, the true basis of credit is real tvealth, ex- 
isting or prospective, which is oi^ is expected to be at the 
command of the party trusted. , Its essence is confidence 
in the ability, truthfulness and integrity of the party 
trusted. When either of these is weakened, credit wavers. 
Just in proportion as credit is pushed out by the sanguine 
hopes and expectations of men, beyond the solid ground of 
existing values, it tends to become illusive and dangerous. 

The useful Functions of Credit. — As we take up 
this topic, a few words are needed to clear away some con- 
fused and erroneous notions wliich are quite commonly 
entertained. 

1 Credit is not Capital. )lt is only a means of transfer- 
ring capital from one person who cannot use it to another 
who can. If a man has borrowed ten thousand dollars 
to set up a flouring mill, the property in the mill is so far 
not his own, nor are the proceeds of running the mill all 
his own. The interest to be paid on this borrowed capital 
is so much added to the necessary outlays of his business. 
His returns must be by so much reduced. 

•(^ Credit does not of itself create Capital. ' It cannot by 

any magical power, make something out of nothing. 

Wealth does not grow by the mere act of passing from 

hand to hand. Its increase comes only from its union 

14 



314 EXCHANGE. 

with labor. The transfer may favor such a union ; it can 
do no more. 

The same capital cannot be used both by the owner and 
by him to whom it is le7it, at the same time. It is plain 
that a farmer who has lent his plough to a neighbor, can- 
not, at. the same time use his plough on his own field. 
No more can B use for his own purposes the thousand 
dollars which he lent to A. He may use A's note as 
security in borrowing the same amount of 0, and C may 
use it again to borrow of D, and so the series may be ex- 
tended to Z. But there is only one thousand dollars of 
capital to be recognized, and the whole series of transac- 
tions is settled by a single act, when A pays that amount 
to^, the last holder of his note. 

But indirectly, credit when held to its legitimate func- 
tions, does render important services to all departments of 
industry. 

1. Credit brings wealth into the form of Capital and 
mahes it available for the increase of wealth. Many persons 
possessing wealth are in circumstances which forbid their 
employing it themselves in a way to make it productive. 
Widows, minors, aged persons, professional men otherwise 
occupied and unfamiliar with trade and manufactures, are 
often the owners of property from which they need an in- 
come, but they cannot by their own labor, make it produc- 
tive. In every community, there are many engaged in vari- 
ous forms of active labor, who can, year by year, lay by little 
savings, but they cannot bring these savings at once into 
union with their own labor. If there were no such thing as 
credit, or if from want of mutual confidence among men, 
it were scantily practised, all this wealth in the aggregate 
amounting to millions of value, must be idle, or be wasted 
in unskillful and unsuccessful attempts to make it yield a 
profit. The various forms of credit furnish facilities for 
transferring whatever surplus wealth any one may have to 



FUNCTIONS OF CEEDIT. 315 

the hands of those producers or traders, who, in active 
business, have the means of employing it to best advan- 
tage. Thus while credit is not itself capital and cannot 
create capital, it does greatly increase the sum of wealtJi 
available as capital for profitable uses, much to the benefit 
of both borrower and lender. 

2.\ Credit gives efficiency to the industrial talent of a 
country. \ Many a person who has strength and skill, and 
all needed qualifications for business, has no capital of his 
own. Without credit, his peculiar, it may be eminent 
capacities must be partially or wholly unemployed. By 
means of credit, however, he is enabled to obtain control 
of capital, on which his energies may be expended so as to 
bring in large returns both for himself and for whoever 
trusts property to his hands. In our country, those who 
have proved most effective in increasing wealth have been 
almost invariably, persons who have begun business with 
only their own energies and a character to inspire the con- 
fidence of others. Patient, effective industry needs con- 
tinually to be sustained by the judicious exercise of credit. 
The best encouragement for a young man to make the most 
of himself is the assurance that his energy and fidelity will 
be a ground of confidence which will secure to him all 
needed means for the employment of his capacities. By the 
general increase of both enterprise and wealth, the whole 
community derives a benefit from such exercise of credit. 

[ Credit is then, in the light of these two views, indis- 
pensable both to the drawing out of the entire capital of a 
country, and also to the most effective development and 
exercise of the industrial talent of a country. These we 
liave seen to be the two elements of production by which 
wealth is increased. Thus the free exercise of credit on a 
sound and stable basis, touches the very springs of indus- 
trial enterprise. 

3; Credit quickens exchanges. The most important 



316 EXCHANGE. 

functions of credit pertain to the sphere of Exchange. In 
that sphere, first in order comes the office named. ( Pro- 
duction must generally be more or less in advance of the 
demand for commodities. The produce of the farmer 
stored in his granary, and the products of the manufac- 
turer waiting for purchasers, are so much capital lying 
idle. It will be of advantage to the producer to make this 
portion of his capital available at once. By selling his 
products for the note of a responsible buyer, payable at 
the end of three months, he is able to do this. For, this 
note in the form of what we have called " Mercantile 
Paper," can be used immediately as the basis of a loan 
and so becomes as serviceable as if the goods had been 
sold for money. The first sale may be to a middle-man or 
a commission merchant, and so it stands at the beginning 
of a series of exchanges through which the goods must 
pass before they reach the consumer. Each sale may be 
facilitated in the same way by the use of credit, and thus 
the articles are brought within reach of the public. Just 
when and where they are needed, and the capital repre- 
sented by their value, is turned over by each party with- 
out delay. It is, as we have seen, only one capital, but 
credit keeps it moving along the whole line of exchanges 
in repeated service. Without this facility, there must be 
temporary suspensions of industry, and long pauses in ex- 
change. This function of credit has very much to do 
with keeping the market of a community supplied all the 
time with things needed. 

4i, Credit serves directly as an Instrument of Exchange. 
The simplest phase of this function in hooTc- accounts has 
been already noticed. \ A buys of B on credit, and B 
buys of A on credit.^ At the year's end, the books on 
either side are balanced, by the payment of the difEerence 
or by simply carrying it over to begin the account current 
for the next year. 



THE CLEAEIKG HOUSE. 317 

\The same thing is accomplished on a larger scale by 
credit in the form of Bank-deposits. \ Suppose a commu- 
nity in which the leading business men make their deposits 
in a single bank. Then, if A makes a purchase of B worth 
a hundred dollars, he will make his payment by a check 
which B will send to the bank, and the amount will be 
added to his deposit account. The check simply withdraws 
a hundred dollars from A's to be added to B's account on 
the books of the bank. B, on the same day, and in the 
same way, may make a payment of the same amount to 
C and C to D and D again to A. Four payments have 
been made by four checks passed into the bank. On each 
of four accounts, two corresponding entries have been 
made ; and yet at the close of the day, the four accounts 
stand just as they did at the beginning. For these trans- 
actions, not a dollar has been drawn out of the bank or 
even counted in it. Credit has been the sole instrument 
of exchange employed. All the business-men in the com- 
munity are using it in a greater or less degree, to fulfill the 
same office. 

In a large commercial city like New York, through a 
hundred or more banks and exchange-brokers, credit is 
doing the same thing every day, for fifty thousand people. 
There, since each bank receives more or less checks on 
other banks, one additional agency is needed to adjust 
accounts between the banks themselves. This is provided 
for in the Clearing House, which is only a kind of central 
bank of deposits for the banks. Each bank keeps a de- 
posit of money at the Clearing House. At a certain hour 
every day, messengers present, at their respective desks, 
the checks, drafts and demands received by the several 
banks, the day previous, carefully sorted, i By a system- 
atic arrangement, the exchange of checks is all effected 
in ten minutes. Thirty-five minutes more are allowed for 
the clerks inside to make their entries, report and prove 



318 BXCHA]S'GE. 

their work. A little further time is given to the detection 
and correction of errors, and ordinarily the entire business 
of the morning is accomplished in one hour. If the de- 
posit of any bank is found to be overdrawn, notice is given 
at once and the deficiency must be supplied during the 
banking-hours of that day. No transfer of money is 
required except to make up these deficiencies. Transac- 
tions of exchange amounting in one day to more than two 
hundred million dollars have thus been settled in the 
space of an hour, saving raucli of both labor and danger, 
involved in the transfer of money from bank to bank. 

Credit fulfills a like office in adjusting exchanges 
between two distant cities. \ It is to be borne in mind that 
the sales and purchases of every community, as well as of 
every individual must be substantially equal. A man can 
buy only as much as he can pay for, and as much as he 
can pay for, he will generally buy, and what he produces 
must pay for what he buys. So it is between two cities, 
Chicago and New York, for instance. The agricultural 
products sent from Chicago must pay for the goods 
brought from New York. The chief instrument of this 
exchange is credit. Thus produce-dealer A in Chicago, 
ships to B, his consignee in New York, ten car-loads of 
wheat whose market-price, at the sea-board, is five thou- 
sand dollars. When the wheat is delivered, A makes a 
draft on B for the five thousand dollars and deposits it to 
his own credit in his bank in Chicago. The bank for- 
wards the draft immediately to the bank in New York 
with which it keeps open account, and the same day sells 
to C, a dry-goods merchant in Chicago, its draft for five 
thousand dollars to pay for goods received from an im- 
porter in New York. Credit in the form of bank-deposits 
has thus effected an exchange between these distant cities, 
of wheat for dry-goods, with only the labor of writing a 
letter or two, and making a few ledger-entries. We have 



CREDIT Ilf FOREIGJS" TRADE. 319 

taken a very simple transaction out of a thousand ex- 
changes more or less complicated, yet all accomplished by 
the same means, every day. If the exchanges between 
two places are equal, the whole business between them 
may be thus adjusted without the transfer of any money. 

If, however, the balance of trade between the two places 
is against Chicago, that is, if the value of the goods which 
Chicago buys of New York, is greater than that of the pro- 
duce which ]^ew York buys of Chicago, the difference 
must be made up in some other way. It might be by 
sending money. But perhaps it will be more advantageous 
to bring accounts with another city into the negotiations. 
Thus, if the balance of trade between New York and New 
Orleans is in favor of New Orleans and the balance of 
trade between Chicago and New Orleans is in favor of Chi- 
cago, credit may still fulfill its function through deposit 
accounts in New Orleans. The Chicago merchants may 
pay for their goods from New York in part, by drafts of 
the Chicago banks on the New Orleans banks, based 
on wheat or other products sent thither. So by the in- 
strumentality of credit, in a triple exchange, the products 
of the western prairies may be made to pay for the goods 
brought from New York. 

The case is essentially the same between the chief trad- 
ing^cities all over the world. "\ The foreign trade of Boston 
is mainly an account current with all the cities of the 
world with which she has commerce. Charges on one side 
are set off by charges on the other, and a very small 
amount of money adjusts the final balances. The value 
of the tea which Boston imports from China exceeds that 
of the merchandise she sends to that country. But she 
sends to the British West Indies, provisions whose value as 
much exceeds that of the goods she imports from those 
islands. The West Indies may settle their debt to Boston 
by bills of exchange on London, and these in turn will 



320 EXCHANGE. 

pay Boston's debt to China. In reality, the flour sent 
from Boston pays for the sugar sent from Jamaica to Liv- 
erpool, and the goods sent from Liverpool to China pay for 
the tea sent from China to Boston, and when the circle is 
complete, the accounts all around are settled. Credit in 
the form of bills of exchange based on bank-deposits is the 
convenient instrument through which all this is effected.^ 
This manifest advantage to all concerned is greater just in 
proportion as communication and trade between all parts 
of the world are made more free. 

i, 5. Credit, to a limited extent, may he safely put into 
the form of currency, and become an actual substitute for 
money. ) The whole subject of currency will be more fully 
presented in another connection. Here, we only state this 
as one of the possible useful functions of credit. It is a 
rule of sound economy to use always the cheapest tools 
which will serve well the purpose contemplated. If a 
paper currency, in the form of promissory notes of banks, 
to an amount equal to double the specie which they hold, 
will effect exchanges well and safely, the real value of half 
the gold and silver fixed in money may be devoted to other 
purposes. So far the instrument of exchange is cheap- 
ened and there is an advantage in using credit for a por- 
tion of the currency. We recognize the fact and yet the 
statement must be qualified by a caveat. This use of 
credit runs always close upon the line of danger, and needs 
more careful restrictions than can ordinarily be imposed 
or maintained. 



It is to be observed with reference to all these functions 
of credit, that a basis of sound money is imdispensadlk 
The value of every thing in whatever way it may be ex- 
changed must be estimated by a standard universally rec- 
ognized. We have seen that nothing but real money made 
of gold and silver can furnish the universal standard of 



ABUSES OP CREDIT. 331 

value required.' Eeal money is the ballast of the ship of 
trade. Credit furnishes the sails. ) Any ballast that easily 
shifts in a storm is sure to bring danger to the ship. 
Hence, the more fully credit is employed as an instrument 
of exchange, the greater the necessity that money, the 
standard of value, be as invariable as possible. Moreover, 
in all the transactions of credit to which we have referred, 
money as a medium of excliange mingles more or less. It 
must be good money, else the whole system of credit wavers 
with uncertainty. The credit which circles the world and 
binds all civilized nations together by the common inter- 
ests and mutual service of universal commerce, must be 
sustained by the all pervading presence of money whose 
value is uniform and stable. Quality in this matter is of 
more consequence even than quantity. The nation that 
robs its money of these qualities of stability and uniform- 
ity with that of the rest of the world, rules itself out of 
free and equal commercial relations with other nations. 

The Mischievous Abuses of Credit. — We must 
recognize credit as an indispensable instrument of ex- 
change. But, like every other good thing, it may be per- 
verted and abused so as to be productive of vast evil. The 
illusory nature of credit as it springs out of men's hopes 
and builds on prospective rather than real wealth, keeps 
an element of danger always in close connection with its 
legitimate use. It is important therefore, that the abuses 
as well as the uses of this instrument be distinctly appre- 
hended. 

^■y 1. Credit is abused when too freely granted. Poor 
human nature is weak and false. Kot every fair prom- 
ise is to be trusted. Some proof of character may fitly be 
asked of those who solicit our confidence. The real or 
probable ability of the party trusted, to return at a future 
day, an equivalent for values immediately transferred must 
14* 



322 EXCHANGE. 

also be remembered. But some in their eagerness to trade 
and some through lack of judgment or nerve to make the 
discrimination, set aside these rules of prudence. Hence 
the ledger of the retail merchant shows many an account 
never settled except by an entry on the debtor side of the 
profit and loss account. Into every little western city, a 
stranger comes occasionally with a stock of goods bought on 
credit in New York which are rapidly sold off at very low 
prices, and then the stranger disappears just as his notes to 
the jobber in the commercial emporium fall due. Men 
wonder how such an adventurer obtained credit. Again 
and again have bankers occasion to mourn over their too 
easy allowance of over drafts to men who turn out insolvent. ' 
Besides the immediate losses involved, such proceedings 
seriously mar the course of regular business ; the honest 
merchant is robbed of his trade by knavish adventurers and 
the community is demoralized ; and many fear to give credit 
to those who really deserve it. 5^ 

2. ; Credit is abused by the wild speculation of borrotvers.J 
One may do what he will with his 07vn, but when doing 
business with another's capital, he is bound to avoid great 
risks. Yet too often we see the borrowed capital recklessly 
thrown out upon uncertain ventures, in utter disregard of 
the creditor's claims. Thus, even the capital of banks, not 
infrequently, becomes involved in the gambling operations 
of the stock-exchange. 

3. Credit is abused by the extravagant living of debtors.] 
A young merchant who has stocked his store with goods 
principally bought on credit, has need to husband his 
gains with strictest care in anticipation of the pay-day soon 
to come. Instead of this, one so situated sometimes 
adopts a lavish style of living, as though his fortune were 
already made when his store is opened and his trade 
begins. It is said that of those who enter the mercantile 
profession, ninety-nine in every hundred fail. The major- 



COJTFIDENCE OPERATIONS. 323 

ity of these failures are caused by rash ventures and ex- 
travagant expenses. 

^.'\ Credit is abused by confidence ojjerations^^TJn^ev 
this head we include schemes of speculation which have 
only credit for their basis, whether organized with the in- 
tention of swindling a credulous public, or projected under 
a temporary illusion by which all concerned are misled. 
In London, a few years ago, with great parade of adver- 
tisements, prospectuses and posters, the •' Cooperative 
Credit Bank " was opened to receive deposits. Eighteen 
per cent per annum payable monthly was the enticing rate 
of interest offered. Some persons of eminence were 
named as trustees. To matter of fact inquirers, the single 
shrewd manager said that the way he had of handling the 
money in connection with " the Gilbert & Chaudiere gold 
fields " enabled him to realize so large a percentage. All 
sorts of fish came into the net. A Church of England rec- 
tor put in eleven thousand dollars ; a ship-chandler depos- 
ited five hundred that it might be in a safe place ; a hp,rd- 
working man with a wife and five children sent the bank 
one hundred and fifty dollars, being fifteen years' saving 
out of his scanty pay of five dollars a week, and so on. 
During the two years of the bank's existence, the balance- 
sheets were of the most flattering character and their cor- 
rectness was certified by a firm of respectable accountants 
who took the managers word for the genuineness of bogus 
accounts. When the bubble burst, instead of two hundred 
thousand dollars which ought to have been on deposit, the 
receiver of the bank found the sum of seventy-five cents, a 
sample of gold dust and a quantity of mining shares. 

The wild speculations in western lands so rife in our 
country in 1836, furnish examples of the other kind of 
operations. Hundreds of ministers and other good people 
were easily drawn to invest their savings in a scheme pro- 
jected by an eminent American divine, for endowing a 



324 EXCHANGE. 

college in Missouri by the purchase and sale of western 
lands. It was confidently expected that the money ad- 
vanced would prove a profitable investment for each of the 
contributors, and at the same time provide a rich endow- 
ment for the college. Without deception or fraud, the 
scheme failed ; the money paid in was all lost and further 
pledges unfulfilled involved some in expensive suits at law. 
The sufferers waked from their fondly cherished dreams, 
wondered at their own delusion and learned how treacher- 
ous a thing is credit abused. 

5. {Credit is abused by the ove'r-estimate of assets, some- 
times for purposes of fraud, sometimes through simple 
self-deception, every man desiring to see the bright rather 
than the dark side of his business prospects. A Eegister in 
Bankruptcy recently prepared a list of over a thousand 
assignments made within two years. It exhibits enormous 
discrepancies between the nominal values presented and- 
the values realized, one estimate of $300,000, yielding but 
$12,000, another of $800,000, shrinking to $24,000. 
This difference is explained in part, by the natural effect of 
sudden and forced settlements in a time of general depres- 
sion, which always causes a shrinkage of assets ; but evi- 
dently a larger part is due to fraud or delusion in the esti- 
mates. The list furnishes also significant illustrations of 
the looseness with which credit is granted on the most 
slender basis. ^ 

6. Credit is abused by tJie betrayal of trusts. 'This 
item in the category needs only to be mentioned. It is 
sadly illustrated by recent failures of Savings Banks and 
Insurance companies, and the sudden collapse of fairest 
reputations. Presidents perjure themselves, swearing to 
false statements ; notes of stockholders are reckoned as 
part of cash capital ; collateral securities held in pledge are 
used as the basis of new loans ; and one whose character 
was never suspected, borrows money at will on stock-cer- 



MISCHIEFS CAUSED BY CREDIT ABUSED. 325 

tificates raised by fraudulent changes of figures, to pass for 
tenfold their true value. 

7.( The most sweeping and mischievous abuse of credit 
appears in the excessive issue of Credit Currency. Of this 
we shall speak more fully hereafter. We do but name it 
in this connection as a most subtle and dangerous disturber 
of all the processes of exchange. 

( Some of the mischiefs caused by these abuses of credit 
must be briefly noticed. 

a. From this cause proceed ruinous fluctuations of 
prices. Mr. Mill says, " The amount of purchasing power 
which a person can exercise is composed of all the money in 
his possession or due to him, and of all his credit," and 
again, " In a state of commerce in which much credit is 
habitually given, general prices at any moment depend 
much more upon the state of credit than upon the quan- 
tity of money." In the ordinary course of business, prices 
are regulated by the simple ratio of demand to supply. 
Suppose now, a far-seeing merchant anticipates an unusual 
demand for certain commodities. Desiring to secure to 
himself as large a profit as possible from the consequent 
rise of price, he begins to purchase largely beforehand. 
He invests first his ready money, then all he can collect 
that is due to him, and at last pushes his credit to the ut- 
most. This creates an uncommon demand at once. The 
market feels it and prices begin to rise. Others begin to 
have large expectations and follow the example. Thus a 
general demand is created which sends up prices rapidly, 
and the thing expected seems to be realized. The move- 
ment is not confined to certain articles, for the spirit of 
speculation is contagious. Trade becomes active in all 
departments, and all, desirous to get a share of the golden 
harvest, push out their whole purchasing power to its 
extreme limit. Prices rise beyond all reasonable grounds 



326 EXCHANGE. 

and still the illusion is cherished. But at last the spell is 
broken. Then they who were so eager to buy are anxious 
only to sell. In the rush of goods into the market, prices 
go down faster than they went up, and the bubble of specu- 
lation bursts, and with it, in the case of not a few, money, 
credit, all are gone. Something like this might happen, 
if purchases were made with ready money, but in that case, 
there is a fixed limit to the fund available for purchases. 
But by an extension of credit, men draw upon an ideal 
fund which is unlimited. From such fluctuations even 
the most prudent must suffer to some extent. The abuse 
of credit is the chief originating cause of commercial crises, 
panics and revulsions. 

h. The losses which ensue from the abuses of credit en- 
hance the rigks of business, and for those risks the com- 
munity must pay. To make good his bad debts, the retail 
merchant must get a larger profit out of his paying cus- 
tomers. In speculations carried on by credit, the apparent 
gain of one involves another's loss, and the aggregate loss 
of tiie community surpasses all the gains made. 

C\ These abuses of credit tend to turn all trade into a 
game of chance. Here and there a splendid prize is won. 
It dazzles the eyes of men. They turn from the patient 
toil and prudent thrift, which are the conditions of a slow 
but sure success, hoping by some bold venture to jump at 
once into a fortune. The general usage makes it difficult 
for those who would, to conduct business on other princi- 
ples. 

d. Through familiarity with failures and frauds, the 
mo'rul sense is deadened with respect to a debtor's obligations.) 
By the abuse of credit, the standard of honesty is lowered. 
Public sentiment becomes tolerant of delinquencies, eva- 
sions, downright defalcations. One who is known to have 
enriched himself by repeated failures, hardly loses his 
standing in society. Hence, a scrupulous conscience with 



CREDIT TO BE SACREDLY GUARDED. 327 

respect to a promise to pay, is pitied rather than praised. 
It is deemed of little importance even to a reputable Chris- 
tian profession ; for a man yersed in the ways of the 
world, it is a troublesome appendage. Why then should 
one restrict his indulgences in order to pay his debts and 
•maintain his integrity ? 

e. The abuse of credit tends to relax the bands of law 
for the enforcement of contracts. In consequence of this 
abuse, the debtor class is multiplied, many without special 
fault of their own are borne on by the general tide, till 
their credit is extended quite beyond their ability to pay ; 
delinquency is regarded as more a misfortune than a fault, 
and so strong are sympathies for so-called unfortunate 
debtors that the collection of debts by legal process becomes 
difficult, almost impossible. The same cause leads to mis- 
chievous legislation which impairs the force of mortgages 
and other securities, and by granting large exemptions, 
furnishes the means of gross evasions and a temptation 
to fraud. 

The remedy for these manifold evils must be found 
chiefly in a change of public sentiment and common prac- 
tice. While we are writing, it comes as the lesson of the 
hour, emphasized by the universal depression of business 
and consequent extreme distress in many quarters, that 
the usages of trade must be changed so as to lay checks 
upon the unlimited extensio7i of credit in the case of indi- 
viduals, of corporations, of cities, of states. It is of far 
more consequence to healthful industry and trade that 
Americans return to the luisdom and prudence of " the 
fathers," than that the much talked of " dollar of the 
fathers" be restored. Commercial credit, like woman's 
chastity, needs to be sacredly guarded. Its brightness and 
worth are marred by one blot of dishonor. The fault may 
be condoned, but confidence is impaired ; the wound may 



328 EXCHANGE. 

be healed, but the scar remains. The maxim of caution 
put into crude verse and current in New England, a hun- 
dred years ago, is good for all men, for all countries, for 
all times : 

\ Ever thy Credit keep, 'tis quickly gone, 
Being got by many actions, lost by one. \ 



CHAPTER XXII. 

BANKS AND CURRENCY. 

The word Bank is of Italian origin. In the infancy of 
European commerce, the Jews in Italy were wont to as- 
semble in the market-places of the principal towns, seated 
on benches, ready to lend money ; hence the term hanh 
from banco, a bench. When any of these money-lenders 
failed, his bench was broken, and so we have the word 
haiikrupt. 

Banks are Agents of Credit. — We have already 
seen how extensive and important are the functions of 
credit in the exchanges of the world. Its complicated 
operations require special attention and management. 
The economical principle of division of labor demands 
that some persons should make it their business to develop 
and direct this part of the machinery of exchange. Banks 
are institutions devised for systematizing credit, and 
bankers are or should be well versed in the operations of 
credit. 

/ 

' Three distinct Offices of Banks are to be recog- 
nized. 

1. The collection and custody of Money-deposits to be 
the basis of credit in trade. If all the exchanges of a 
community were to be effected by money alone, every 
business-man must have in his own keeping a considerable 
amount of money. To keep this secure from robbery and 
loss would involve no little pains and expense. Much 



330 EXCHANGE. 

labor would also be required to count the specie paid and 
received, and the cost of doing business would thus be in- 
creased. Suppose that, instead of every man's doing all 
this for himself, the business-men agree that one person 
shall procure a safe repository for all the specie in the 
neighborhood, and become responsible for its safe-keeping 
and transfer, as ordered. This would provide a bank and 
a banker for the community. Then as each deposits what 
he receives and draws for what he pays, credit is made to 
effect exchanges in the manner heretofore described, and 
the money lies for the most part secure in the vaults of the 
banks. From this simple nucleus, the system may be ex- 
tended so as to combine a number of banks in a large city, 
the banks of cities in different parts of a country and the 
banks of different countries. At the same time such an 
institution would render important service in gathering 
up a great deal of capital which would otherwise be scat- 
tered and useless in the hands of persons unable to em- 
ploy it, and making it available for the office next to be 
namedw 

2. The secojid office of banks is to loan and discount 
ioth money and credit. We have seen that for the increase 
of wealth, labor and capital must be combined. But 
often, one man has the capital and another the capacity to 
labor. It is the office of the bank to bring the two ele- 
ments together in the most expeditious and convenient 
way. He who has the capital, may put it into the bank 
to be loaned for him. He who needs the capital can go 
directly to the bank and borrow. The banker, devoting 
himself to this occupation of loaning, becomes expert in 
such negotiations, keeps himself informed as to the char- 
acter and responsibility of borrowers and understands all 
the legal forms necessary to a valid, contract. 

t The terms loan and discoufit mean essentially the same 
thing, but indicate two distinct modes of lending adopted 



THE OFFICES OF BANKS. 331 

by different classes of banks. Savings-hanks receiye on 
deposit the small savings of great numbers of people of 
limited means, make loans generally on long time, secured 
by real-estate or other ample sureties, and collect the in- 
terest semi-annually, as it accrues. Commercial-banhs 
gather funds of the wealthy as their capital and the tem- 
porary deposits of men in active business, and make their 
loans for short time, sixty or ninety days, on personal 
security, taking interest in advance, as a discount or de- 
duction from the principal sum borrowed. Often also, the 
amount thus borrowed is simply credited to the account of 
the borrower, to be drawn on as other deposits are by 
checks, without the withdrawal of any money at all. It 
becomes thus, in whole or in part, a loan of credit rather 
than money. 

3.1 The third office of banks is to issue prornissory notes 
for general circulation as substitutes for money. This 
creates a paper currency. ^ In. the simplest method of 
doing this, the bank loans not the specie which it holds, 
but its own notes payable in specie, receiving in return the 
notes of individuals, guaranteed by endorsers, for the 
amount loaned, to be paid at a future day. From this, a 
two-fold advantage is derived. In the first place, these 
notes become a medium of exchange more convenient than 
specie, because lighter and more easily and safely carried 
about. If the amount of notes issued is Just equal to the 
amount of specie in the vaults, the holders would always 
have a double security, viz., the specie in the bank and 
the obligations of those to whom the notes were loaned. 
The law often makes individual stockholders also liable 
for an additional amount equal to that of their stock. Pa- 
per in the form of checks of individuals on a bank of de- 
posit, might be made to circulate to some extent as a 
substitute for money, but it could be only as each man's 
character and standing were known. The bank is a public 



332 EXCHANGE. 

institution in which all have confidence and hence its notes 
are readily accepted by all. 

The other advantage is that paper, a substance much 
cheaper than gold and silver, may, within certain limits, 
fulfill all the functions of an instrument of exchange, and 
permit a portion of the precious metals to be applied to 
other uses. There is economy in thus cheapening the 
instruments of trade, provided the restrictions are such 
that their fitness for the required service is not impaired. 
The bank-notes may safely be issued in excess of the specie 
held in reserve ; for they can never all be presented at 
once, and the notes of borrowers falling due day by day, 
may be relied on to provide in part for; the redemption of 
the notes as they may be presented. This view is sound 
provided the safeguard of fixed limits to the amount of 
notes thrown into circulation is rigidly maintained, j 

Banks, in the fulfillment of these offices, confer another 
incidental benefit, especially in a new country. As public 
corporations of known character, they offer inducements 
for the introduction of foreign, capital, j In a young and 
growing country, capital is scarce and at the same time, 
more productive than in older countries. The higher 
rate of interest offered is a strong attraction to capital 
from abroad, and banks properly established provide a 
safe channel through which it may come in. 
i. Through these offices, banks have also rendered very 
important services to the finances of sovereigns and states, _^ 
steadying and strengthening the bands of government and 
furnishing efficient aid in the emergencies of war and of 
great national enterprises. 

A few facts drawn from the history of hanks will 
further illustrate their nature and operations. 

The Bank of Venice, founded A. D. 1171, was the ear- 
liest banking institution in Europe. It was based upon a 



BANKS OF VENICE, GENOA AND AMSTEEDAM. 333 

forced loan of the Eepublic. The reigning duke, in order 
to raise means for carrying on a crusade, obliged a number 
of the most opulent citizens to advance funds to a " CJiam- 
her of Loans " to which the contributors were made cred- 
itors, receiving a yearly interest of four per cent. The 
funds so deposited could not be withdrawn, but were trans- 
ferable on the books, at the pleasure of the owner. It 
provided also for the safe custody and transfer of special 
deposits. The bank credits, in form like modern certifi- 
cates of deposit, were at a premium for purposes of trade. 
This bank of Venice served well the exigencies of the 
state, and was of great advantage to its wide-spread com- 
merce. ( Its operations, thus confined to the regulation of 
credit, as based on deposits, were maintained in full vigor 
for four hundred years, and its existence continued till 
the year 1797, when it fell, with the city itself, at the con- 
quest of Italy by Napoleon. . 

The Bmih of Genoa, established in 1407, also to meet 
the necessities of the state, was the first to issue circulat- 
ing notes. ) These, however, were not made payable to 
bearer, but passed only by endorsement. They were 
probably issued only for large amounts and employed in 
large transactions. 

The Banh of Amsterdam, established in 1609, was the 
first instituted expressly to promote the interests of com- 
merce. Its primary object was to remedy the inconvenience 
arising from the great quantity of clipped and worn coin 
in circulation. It was a bank of deposit only, the credit 
given in the bank-book for coin deposited was called bank 
money. The regulations of the country directed that all 
bills drawn upon or negotiated at Amsterdam, above a 
certain amount, should be paid in bank-money. This 
obliged every merchant to keep an account at the bank, 
and held its money at a premium. The Bank of Ham- 
hurg was established ten years later on the same plan. 



334 EXCHANGE, 

Its deposits however, were in the form of bars of silver 
bullion. Both these banks professed to lend out no part 
of their deposits. But the guardians of the bank of 
Amsterdam proved at last unfaithful to their trust in this 
respect and caused its ruin. The bank of Hamburg con- 
tinues to this day, commanding the highest confidence of 
the commercial world. ? 

f The Banh of England, founded in 1694, was the first 
institution that was authorized to issue hank Mils payable 
to hearer at sight. '. It has been from the outset, an agent 
of credit for both the finances of the government and the 
service of commerce. Its entire capital now amounting 
with accumulated profits to eighty-eight .million dollars, is 
permanently loaned to the government. '\ It fulfills all of 
the offices we have named, being a bank of deposit, of loan 
and discount, and of circulation. It can issue seventy 
million dollars of notes, (none under five pounds, or 
twenty-five dollars) against that amount of government 
securities set apart for the purpose. It may also issue 
notes beyond this, against an equal amount of gold and 
silver held in reserve. Its notes are practically a legal ten- 
der everywhere in the kingdom except in payments by the 
bank, though the constitutionality of the law in this 
respect has been questioned. No note returned to the 
bank is ever re-issued. ' The bank is itself a private corpo- 
ration, but it has the state for a partner, and the two 
stand together for mutual support. It acts as the agent 
of the government in managing the national debt. Dur- 
ing the long Napoleonic wars, it rendered indispensable 
aid to the government, and under the pressure of urgent 
necessity, it was allowed in 1797, to suspend specie pay- 
ment, and the suspension continued through twenty-five 
years. In England, outside of London and its vicinity, 
there are many joint-stock banks which also issue notes of 
circulation. But the bank of England is the great regu- 



THE BAJSTK OP FEAIfCE. 335 

lator of credit in all forms. It is the most powerful of all 
modern ■banks and its influence affects the commerce of all 
nations. ) 

. The Scotch banking-system is peculiar in its method 
of oiving what are called cash-credits. When a man 
wishes a cash credit, he finds a bondsman, who promises 
to indemnify the bank for all that it may lose, by loaning 
to him within a certain sum ; or else he places real estate 
in the power of the bank, to a sufficient amount to render 
it secure within the sum which he wishes to borroAv. The 
bank then opens with him a cash account, or allows him 
to draw for any sum within the specified amount. He is 
charged interest only for the amount which he borrows. 
As fast as he is in funds, he deposits all he can spare, in 
the bank, and for everything thus deposited, he is allowed 
interest ; so that his interest on deposits always diminishes 
the interest on his debt. Thus he borrows and pays, suc- 
cessively, and at stated seasons, the accounts are adjusted. 
This system is especially favorable to men of small means, 
and furnishes full security to the banks. 

The Bank of France is like that of England, a private 
corporation, but unlike that of England, it does not 
directly manage the revenues of the state ; but by lending 
freely to the government, it has borne it safely through 
extraordinary exigencies. - Founded in 1800, since 1803 it 
has had the exclusive privilege in Paris, and since 1857, in 
France, of issuing notes payable on demand. Its notes 
are a legal tender in payment of all debts, public and 
private. (During the revolution of L848, and again on the 
breaking out of the war with Prussia in 1870, it was au- 
thorized to suspend specie payments. But so wisely were its 
affairs managed and so faithfully did the government keep 
its promises, that notwithstanding it has loaned to the 
government since 1870, six hundred million dollars, its 
notes have, except for a brief period, remained at par and 



336 EXCHAN^GE. 

now, January, 1878, it is resuming specie payment. I The 
secret of its soundness and strength is the policy of keep- 
ing large reserves of coin in proportion to its circulation) 
The first Batik authorized in the United States, origi- 
nated in a union of citizens in Philadelphia, in 1780, to 
supply the army with rations. They were allowed to form 
a bank and to issue notes to buy the articles required.) Jn 
December, 1781, this bank was chartered by the Congress 
of the Confederation, under the name of the Bank of 
North America, with a capital of four hundred thousand 
dollars. The next year, a charter was also granted to the 
company by the legislature of Pennsylvania, j It still 
exists, being now one of the national banks of our coun- 
try. In three or four of the other states, banks were soon 
after chartered in the same way. 
I The new constitution under which the government 
was organized in 1789, contains the clause that no state 
shall ''coin money, emit Mils of credit or make anything^ 
iut gold and silver coin a tender in payment of debts.^'J 
This clause was no doubt, designed to prohibit the issue of 
a paper currency, from the evils of which the country had 
suffered severely.\ Under it, however, two questions have 
been raised. First, can a state authorize hanks to do what 
it cannot do itself ? Second, can the tiational government 
do what the states cannot do in respect to '' bills of 
credit ?" .Both questions have been answered in the 
affirmative. Bank notes are not considered "bills of 
credit " in the sense of the prohibition. And the general 
government has been justified by the Supreme Court in 
making its notes, the greenbacks of to-day, which are 
simply ''bills of credit," legal tender. ; Great numbers of 
State banks have accordingly been authorized and two 
hanks of the United States have been chartered by 
Congress for limited periods. All of these banks fulfilled 
the three offices named, under various regulations such as 



STATE BASTKS. 337 

difPerent legislatures saw fit to impose, and hence were 
very diverse in their character and in the quality of the 
currency issued by them. 

( The old State hanhs were created by special charters of 
incorporation from the legislatures, and had more or less 
the character of monopolies. '■ Sometimes the banking com- 
pany was required to pay a bonus to the state for its pecu- 
liar privileges. '\ The early banking of New England in 
the first years of this century was very loose. Each 
charter named the amount of capital stock to be provided. 
But in many cases, subscribers to the stock, instead of 
paying in cash, simply gave their notes for the amount of 
their shares. On this frail basis, a bank issued circulating 
notes freely, sometimes in denominations as low as twenty- 
five cents. Such a currency necessarily drove out specie, 
till but little was left in the region. That little was 
moved from bank to bank to keep up a show for the visits 
of inspectors. In due time, a collapse came. One bank 
in Khode Island, founded in 1804, had a nominal capital 
of a million dollars. Of this, less than twenty thousand 
dollars was ever paid in. The directors, soon after begin- 
ning business, withdrew what they had paid in, leaving 
only about three thousand dollars. This was afterwards 
absorbed by one director, who bought out his eleven col- 
leagues, paying them with bank funds, and then borrowed 
of the bank over seven hundred thousand dollars. When 
it failed, this bank had in specie $86.46, and its outstand- 
ing bills were estimated at nearly $600,000. Similar 
frauds were committed in Michigan and other western 
states, from 1833 to 1840, with like mischievous results. 
This mode of doing things was then fitly termed " ivild- 
cat ianhing" 

i The crash in Xew England led to the passage of strict 
banking laws and to the general demand for higher in- 
tegrity in the management of such institutions. Thus 
15 



338 EXCHANGE. 

many of the state banks of that section were placed on a 
sound basis and have maintained their credit unquestioned 
to the present time. 

Various measures have been adopted from time to 
time for the purpose of keeping bank notes good. The 
\ Suffolk hanh system of Massacliusetts required each coun- 
try bank to keep a certain amount of specie on deposit 
with the Suffolk bank in Boston for the redemption of its 
/notes, and bound the banks together for mutual supporfc\ 
. The Safety-Fund act of New York required each bank to 
put into the hands of the State Treasurer an amount of 
specie equal to three per cent of its capital stock. The 
safety-fund thus gathered was held to make good tire debts 
of any bank that might become insolvent. This made ifc 
a matter of common interest for the banks to watch over 
and sustain each other. 

The Free hanking system was introduced in New York 
in 1838, as a substitute for the method of granting special 
charters. This allowed any number of persons to form a 
banking association on meeting certain prescribed condi- 
tions. Under this system, the redemption of bank-notes 
was provided for by the deposit with a bank-comptroller 
appointed by the state, of stocks of states and of corporations 
and bonds and mortgages, the issue of each bank being 
limited by the amount of securities held on its account.^ 
The value of this security would of course vary with the 
character of the deposit. ' This system was adopted quite 
generally by the states west of New York and continued 
until the present national bank system. 

Two Banks of the United States have place in our 
nation's history, each continued for a period of twenty 
years. The first, projected by Alexander Hamilton, was 
chartered by act of Congress in 1791, with a capital of 
$10,000,000. Its charter expired in 1811, and was not 
renewed. The second was chartered in 1816, with a capi- 



THE KATIOKAL BANK SYSTEM. 339 

tal of 135,000,000. A bill for the renewal of its charter 
passed both houses of Congress, but was vetoed by Presi- 
dent Jackson, and in 1836, it was closed as a government 
institution. Each of these banks rendered important ser- 
vice in the management of the national finances and as a 
bank of deposit, discount and circulation, helped to steady- 
credit and to promote exchanges in all parts of the coun- 
try. In the discussions concerning the re-charter of the 
bank, however, it plainly appeared what a political power 
such a corporation might become. The bribery, misman- 
agement and bold speculations witli which the last bank 
closed its career, under a charter from the state of Penn- 
sylvania, also clearly showed that such an institution 
might work mischief on a scale proportioned to its great- 
ness. The people have therefore acquiesced in the decree 
which terminated its existence, and it is not likely that 
another bank of the United States will soon, if ever be or- 
ganized. 

Under the system of state banks, frauds and failures 
were frequent, entailing heavy losses on the holders of 
bills, and much distrust in business circles. Exchanges 
between distant parts of the country were thus embarrassed. 
For many years the premium paid in Wisconsin for New 
York money or drafts was from three to five per cent, add- 
ing so much to the prices of all goods brought from the 
East. 

The existing National Banh system was established in 
1863, by act of Congress, and the next year it was put 
under the charge of a bureau of the Treasury Department, 
the chief ofldcer of which is the comptroller of the cur- 
rency. Under this act, a national bank may be organized 
by any rmmber of persons, not less than five, the capital 
in any instance, to be not less than $100,000, — except that 
in cities containing a population not exceeding six thou- 



340 EXCHANGE. 

sand, banks may be established with a capital of not less 
than $50,000. The capital stock in cities having a popu- 
lation of fifty thousand must be not less than $200,000. 
Not less than one-third of the capital must be invested in 
United States bonds, upon which circulating notes may be 
issued equal in amount to ninety per cent of the current 
market value, but not to exceed ninety per cent of the par 
value of the bonds deposited. The notes officially certified 
are receivable at par in the United States in all payments 
to and from the government, except for duties on imports, 
interest on the public debt and in redemption of the 
treasury notes. They are redeemable on demand in lawful 
money of the United States. ' 

Soon after this system was instituted, an act of Con- 
gress imposed a tax of ten per cent on the notes of state 
banks used for circulation after August 1, 1866. This, of 
course, excluded these notes from further circulation and 
most of the old state banks reorganized under the national 
system. The present bank currency of our country, 
therefore, consists of notes of national banks which are of 
uniform value in all parts of the country and the payment 
of which is guaranteed by the United States. The whole 
amount of these notes which could be thrown into circula- 
tion was at first limited to $300,000,000 ; subsequently it 
was raised to $354,000,000, but it is now unlimited. The 
amount actually in circulation, November 1, was nearly 
$317,000,000. These banks receive deposits, sell bills of 
exchange and loan money at the rate of interest allowed 
by law in the states where they are located. For the cir- 
culating notes, this system provides all the security which 
the credit of the United States can give, but offers none for 
deposits and other liabilities except that all shareholders 
are held individually liable to the extent of the amount of 
their stock, in addition to the amount invested therein. 
In case of the failure of a national bank, a receiver may 
be appointed by the comptroller to wind up its affairs. 



LIABILITIES AKD EESOURCES OF BAKKS. 341 

; Private Banking houses exist in all parts of the coun- 
try, which receive deposits, make loans and negotiate ex- 
change, but issue no circulating notes. ; Some of these 
have gained a character and standing and extent of busi- 
ness fully equal to those of strong banks. Their credit 
rests upon personal integrity, wise management and large 
resources accumulated through years of devoted industry. 

\ Savings Banks, for the most part, without capital, sim- 
ply receive and loan deposits. It was estimated in Janu- 
ary, 1877, that the savings banks of our country held de- 
posits amounting to one thousand million dollars. The 
entire banking business of the country, at that date was 
represented by seven hundred million of capital and two 
thousand million of deposits. 

The Liabilities and Resources of Banks under 
the present system, set down in distinct statement, will 
further illustrate the principles and usages of these insti- 
tutions. 

The Lialilities are embraced in the following items : 

1. The Capital Stock, which is the amount paid in as 
the basis of business, and for which the bank is responsi- 
ble to the several shareholders. 

2. The Circulation, yihich consists of promissory notes, 
signed by the officers of the bank, payable on demand, and 
circulating in the community as substitutes for money. 

3. Deposits,' yihich includes all sums standing on the 
books of the bank to the credit of individuals, partnerships 
or corporations, that are payable on demand. 

4. Balances due to other Banks. This is a form of 
deposits incidental to the necessary open accounts of banks 
with one another, but they deserve a distinct notice on 
account of a peculiar danger which attends them. The 
exigencies of business require that the small interior banks 
should all have funds deposited with leading banks in the 



343 EXCHANGE. 

great centres of commerce to draw against. The banks, 
of the great cities accumulate liabilities of this kind to a 
large amount. In any emergency, these deposits are lia- 
ble to be drawn out so rapidly as to bring on or aggravate 
a commercial crisis. 

5. Surplus funds or Reserves, held to strengthen the 
bank against contingencies. The national bank act 
requires each bank statedly to carry a portion of its net 
profits to such a fund until it amounts to twenty per cent 
of the capital. The reserve is really an addition to the 
capital, and belongs to the stockholders, enhancing the 
market value of the stock. Hence it is properly reckoned 
with the liabilities. 

6. Undivided Profits and unpaid Dividend^. As the 
business of a bank runs on, there is more or less of cur- 
rent profit undisposed of, and some dividends are uncalled 
for. For all these the bank must hold itself accountable. 

7. Miscellaneous UaMlities- emhracmg little obligations 
of various kinds not classified. 

I The Resources of banks may be distributed in the fol- 
lowing classes^: 

1. 1 Loans. This item includes all that is due a bank 
from its customers for discounts and advances represented 
by notes or other obligations, payable from day to day as 
they mature. 

2. United States Bonds deposited with the comptroller 
of the currency to provide for the ultimate redemption of 
the bank-notes. These are held sacred for that liability, 
but have a value more than sufficient to cover it. 

3. United States Bonds and other stocks, bonds, etc., 
purchased and held for investments^ that the means of the 
bank may be productive and at the same time more readily 
available than they would be if loaned to individuals. A 
portion of the Eeserve is often held in this form. 



PEOFITS OF BANKS. 343 

4 Balances due from other BanTcs. 1 This corresponds 
to the similar item on the other side, and is incidental to 
the open accounts between banks. 

5.1 Real es^a^ejincluding a place for doing business and 
such other property of this kind as may, in settlement with 
its debtors or otherwise, come into the possession of a bank. 

6(^ Exclianges and Cash ^Yems,\embracing checks, sight- 
drafts and bills of exchange, more or less of which are each 
day found with a bank in transitu. 

?.(' National hanh notes and Legal tetider notes held to 
meet daily calls for currency.; 

%J Legal tender notes and specie, held for the home re- 
demj^tion of circulating notes. ^) 

9. [Miscellaneous Resources, ja, general term for various 
assets which find no place in the previous classification. 
With a sound bank, the amount under this item is small. 

In a regular bank statemenb, the liabilities and re- 
sources thus presented, always balance each other, and the 
items on either side show the actual condition of the bank. 

The Sources of Profits of Banks. — 1. The chief 
profit of a bank comes through Interest received. Under 
the national system several distinct sources of interest may 
be noticed. 

a. ( Interest on United States honds, amounting to at 
least one-third of the capital,) deposited with the comp- 
troller of the currency. This at from four to five per cent 
inures to the benefit of the bank, unless its waning credit 
compels the comptroller to retain it for additional security. 

h. \Interest on the amount of circulating notes issued in 
loans, at the legal rates.) This is so much added to inter- 
est on the bonds, except for the surplus of bonds above the 
amount of notes. 

c. Interest on the remaining Capital, loaned to cus- 
tomers or held in productive stocks. 



344 ' EXCHANGE. 

d. Interest on a portion of the deposits held. Since 
generally the amount of deposits brought in each day is 
about equal to the amount withdrawn, a bank may 
safely loan a portion of its average deposits. The sum 
total loaned by a bank is thus often two or three times 
the amount of its capital stock. Banks are strongly 
tempted at times to carry this loaning of deposits beyond 
due bounds so as to endanger the interests of both depos- 
itors and the banks themselves. 

2. Premiums on Exchange. A small percentage, vary- 
ing with the state of the market, is charged for drafts or 
bills of exchange on banks in other places. The aggregate 
of these premiums is considerable, and for the most part 
is clear profit. 

3. Commissions for Collections. Banks, as institutions 
well known and of established credit, often have sent to 
them claims to be collected. As agents of credit in this 
form, banks assume no risks, but charge a small percent- 
age for their service. 

With prudent management, the profits of banks are 
sure and compare favorably with those of any other busi- 
ness. Of late, there has been some drawback from heavy 
taxation of these institutions by both the state and the 
federal government. The undue expansion of loans in 
order to increase profits, involves the danger of throwing 
the centre of gravity outside the base, with a consequent 
downfall. 

Currency. — In its broadest sense, this term embraces 
whatever in the usages of trade passes from hand to hand 
as a medium of exchange. Following the distinctions 
made by Mr. Amasa Walker, we may specify four kinds of 
currency. 

1. Vahte Currency. This consists of coined money, 
made of the precious metals, and having in itself a uni- 



CUREEKCY. 345 

versally recoguized value which makes it always accepted. 
It needs no security except safeguards against counterfeit- 
ing and debasement. Eespecting this, nothing need be 
added to what has been already said in treating of Money. 

2. Mercantile Currency. This is a term adopted by 
Mr. Walker to signify promises payable on demand, issued 
by responsible parties for the payment of which in full, 
coined money or bullion of equal amount is held in trust 
by the promisors. This adds to the security of hard 
money the convenience of paper to represent real valuesv 
Such are the notes of the bank of Hamburg, and such 
were those of the bank of Amsterdam, in its best estate. 
That such a currency is both practicable and very service- 
able is proved by actual experience in the past. It would 
need no restriction upon its issue. It would take care of 
its own reputation and would always be a satisfactory ten- 
der in payment of debts, without any enactment of law to 
that effect. It would also furnish ample scope for profita- 
ble and safe banking. It may, however, be questioned 
whether such a currency, with all the specie that could be 
brought into use by its side, would be sufficient for the 
requisitions of modern trade, Since credit has complica- 
ted itself so extensively with the currency of all the lead- 
ing commercial nations, it will probably be impossible now 
to bring the commercial world back to the adoption of this 
basis exclusively. To attempt some approximation to it 
may be successful so far as to yield real advantages. 

3. Mixed Curreiicy. This is formed of written prom- 
ises to pay specie on demand, issued in excess of the actual 
amount of specie held by the promisors for their redemp- 
tion. It is called mixed because its basis is partly coined 
money of real value at hand, and partly credit in the form 
of notes discounted by the banks which throw it into cir- 
culation. The presumption is that the payment of cus- 
tomers' notes as they mature, will keep the bank provided 

15* 



346 EXCHANGE. 

with whatever additional means may be required above 
the specie in the vaults, to meet the circulating notes as 
they are presented. The currency of the old state banks 
of our country was wholly of this character. Its security 
depended on the proportions of the specie and the credit 
severally to the amount of currency issued. In some 
states, these proportions were regulated by law so as to 
secure general soundness of this currency. In the so- 
called " wild-cat " banking before described, all such pre- 
cautions were wanting, and the results could only be dis- 
astrous. In this category of mixed currency, our present 
national bank notes must also be placed. They are pecu- 
liar only in this respect, that the credit which enters into 
their basis, is the credit of the nation, and its strength is 
supposed to be such that only a small proportion of specie 
will need to be kept in store, even when specie payments 
shall be generally resumed. 

In considering this kind of currency, it is important to 
bote the distinction between its ultimate redemption and 
its immediate convertibility. Legitimate banking would 
always show a large margin for the ultimate redemption 
of the currency ; and yet this might be with very insuffi- 
cient provision for its immediate convertibility. This 
point is well illustrated by Mr. Walker 'in some statistics 
respecting the condition of the state banks in our country 
on the first of January, 1860. At that date the immediate 
liabilities of the banks of the United States were — 

Circulation $207,102,477 

Deposits 253,803.129 

Due other banks 55,932,918 

Other liabilities 14,661,815 

1531,499,339 

Immediate resources : 

Specie $83,594,537 

Cash items 19,331 ,521 

Notes of other banks 25,502,567 

Due by other banks 67,235.457 

—$195,664,082 

Excess of immediate liabilities over immediate resources $335,835,257 



MIXED CtJEREKCY. 347 

It is evident from this statement that a special run 
upon the banks for the payment of circulating notes or of 
deposits, or both, (for both are apt to move together) 
would reveal their inability to meet their obligations. Yet, 
at the same date, the banks held the following assets as 
ultimate resources : 

Loans $691,945,580 

Stocks 70,344,343 

Keal estate 30,782.131 

Other investments 11,123,171 

Total $804,195,225 

Deducting the excess of immediate liabilities as 

above 335,835,257 

Surplus $468,359,968 

This margin seems quite sufficient to guarantee per- 
fectly the ultimate redemption of the currency. The 
trouble is that under a panic the banks cannot realize 
funds from their assets, fast enough to meet the calls for 
the redemption of their notes and deposits. If they could 
do so, the necessity of declining to renew their loans 
would produce a commercial crisis, and cause a general 
bankruptcy of men in business. In such exigencies, the 
only relief is for the banks to suspend specie payments. 
This is a measure adopted not so much for the relief of the 
banks themselves, as for that of the entire community. 
The banks might perhaps save themselves, but it would 
be at the expense of almost certain ruin to hundreds, and 
of immense loss to all engaged in trade. The effect 
of a suspension is really to gain time for all parties 
to turn assets, curtail credits and bring the operations of 
business on to a sounder blisis. It is always an evil but 
often a necessary evil which leads to wholesome results. 
The undue expansion of credit during a period of suspen- 
sion, is an abuse which can only aggravate the mischief. 

Our national bank system furnishes no certain safe- 



348 EXCHANGE. 

guard agaiust this contingency. Ordinarily, the govern- 
ment bonds can be converted into cash at once, and so far 
they are better than the discounted notes of individuals 
for the immediate conversion of circulating notes. But it 
is easy to conceive of an emergency when the credit of the 
government might be impaired or subjected to a special 
strain, so that the market would be glutted with bonds. 
Coincident with this, a run on the banks for the payment 
of deposits would be likely to take place and the immediate 
redemption of circulating notes would be quite impossible."^ 
I The mixed currency of England is in some degree 
guarded with respect to this liability by precaufionari/ 
measures of the Batik of England. Its officers have an 
eye continually on the flow of specie. As soon as it ap- 
pears that the stock of specie in the country is diminishing, 
the bank raises its rate of interest. This tends to reduce 
the discounts and is a signal to all of danger and a call to 
curtail credits. As a consequence, the bank of England 
and all other banks of circulation fortify themselves by 
adding to the amount of their specie reserves. Thus, often 
by timely precaution, the danger is averted. When on 
the other hand, the amount of specie seems superfluous, 
the opposite course is taken ; the rate of interest is reduced 
and through increased loans, the funds go into circulation. 
The central banking institution serves as a great balance- 
wheel to regulate within certain limits both the currency 
and credit in trade. 

4; Credit Currency. This consists of engraved notes 
bearing promises of a government to pay specified sums of 
money, at a distant or indefinite period in the future. 
These by force of law or peculiar circumstances, are ac- 
cepted as money and fulfill its functions. The " Conti- 
nental money '"' of revolutionary times, the French " As- 
signats" of 1790, and the United States treasury notes, 
now in circulation, known as ''greenbacks," are examples 



CKEDIT CURRENCY. 349 

of this kind of currency. It has no basis but the credit of 
the nation. It is but a symhol of value, and has purchasing, 
power only as men have faith in the promise. If the 
course of the government is such as to impair that faith, 
the purchasing power of these symbols declines, until at 
last it utterly fails, as was the case with the American con- 
tinental currency and the French assignats. 

On the face of the " greenback " before us we read 
" The United States will pay the leaver ten dollar s.^^J 
The seal of the United States treasury and the signa- 
tures of the Treasurer and of the Register of the treasury 
certify the genuineness of the promise and bind the gov- 
ernment to its fulfillment. On its back we read, " This 
note is a legal tender at its par value for all debts puMic 
and private, except duties on imports and interest on the 
puMic debt." This engraved slip of paper is then simply 
an evidence of debt. As it circulates from hand to hand, 
it can only transfer debts ; it camiot pay them. You may 
offer this note to your butcher in payment of his bill. He 
is" obliged to accept it, but by the transfer, the government 
just takes your place as his debtor. It is not itself, as a 
gold eagle would be, a '• quid pro quo '"' for the meat he 
has furnished you. When passed back to the government 
for taxes or other public dues, it is a mere counter for 
canceling reciprocal obligations. Its only support, as it 
flies hither and thither, is that word " dollars " which 
means real value — a certain weight of gold or silver — 
which, some day, it will bring to its bearer. Withdraw 
that word or nullify its meaning by a hint or a suspicion 
that the government never means to redeem the promise, 
and it will drop at once, like a dead leaf to the ground, 
speedily to decay. Yet, men talk as if a nation's trade 
could be carried on with a currency made of these govern- 
ment promises, forever irredeemaUe. 
j A credit currency can circulate only in the country 



350 EXCHAlfGE. 



ibhere if is issued. ) There it inevitably supplants gold and 
silver which are sent abroad to adjust exchanges with 
other countries. ' If, as is sure to be the case, these notes 
are issued to an amount exceeding the natural demands of 
trade for a medium of exchange, their value will be depre- 
ciated, and specie, as compared with them, will bear a 
premium. That premium will rise or fall as men's confi- 
dence in the ability or policy of the government varies, and 
its amount indicates the extent to which the currency is 
depreciated. It is not the value of gold which changes, 
but that of currency only. In such circumstances, no 
direct legislation can prevent or fix the premium on gold, 
nor change it except for the worse. The force of civil law- 
is as powerless to resist the operation of the laws of value, 
as was the voice of the old Danish king in England to stay 
the inflowing ocean-tide. 

A credit currency tends to raise the prices of all com- 
H'lodities, and to heep prices fluctuating. \ The paper sym- 
bol comes necessarily into comparison with values of every 
kind. It has in itself no natural basis of value. It rests 
on credit only, not at all on its cost. Its acceptability de- 
pends mainly on the hopes, wishes and anticipations of 
men. In a time of general confidence, the government is 
led to over-issue its promises. The effect is at once to en- 
hance prices ; and the first consequence of this is that 
trade is unnaturally stimulated and demands a yet larger 
issue of currency, until the day of reaction and distrust 
comes. In the actual experience of nations as recorded in 
history, it appears that no government, once drawn into 
the issue of a credit currency, has been able to adhere to 
its purpose, often taking the form of a distinct promise, to 
limit the issue to a certain amount. The door once opeu 
is not easily shut — the power released is not easily curbed 
again. Mr. Walker says with truth, '•' When the Secre- 
tary of the United States Treasury endeavored to "float" 



CKEDIT CUREEN'CT. 351 

his bonds by the issue of credit currency, lie unfortunately- 
floated all the merchandise of the country at the same 
time, so that the rise of prices compelled him to pay 
double for all the government needed ; and hence he lost 
at least one-half of all the bonds that were thus sold." At 
the same time, it produced a mischievous disturbance in 
all commercial transactions, essentially changing the force 
of existing contracts and reducing the value of fixed 
incomes. 

Through this enhancement of prices, a credit currency 
lays a direct tax on a people, which is measured by the 
degree in which the currency is depreciated. If a ten 
dollar treasury note will buy only eight dollars worth of 
merchandise, at the gold prices, he who uses the note 
really pays a tax of two dollars in making that purchase. 
The government laid this tax, though it gets no benefit 
from it, except through the extension of its credit. If 
such a currency is never redeemed, the country is taxed for 
its whole amount, but the tax is very unequally distrib- 
uted. If it is finally paid, the sum total is greatly increased 
through the enhanced prices paid by the government for 
things needed in the hour of its extremity. For that 
final payment, some contraction of currency is inevitable, 
and while it is going on, business has to be done on a 
"falling market," that is, with prices declining. This 
makes men groan and murmur ; they forget that they are 
only paying the cost of their cherished illusion — the appar- 
ent prosperity of the day when the inflation of the cur- 
rency gave them what they deemed the benefit of "a ris- 
inof. market." 

I A Credit currency is a forced Loan. This appears 
tibxn the manner in which it is issued. Note for example 
the course of our government in issuing its treasury notes. 
It was in immediate need of provisions and munitions of 
war. Instead of raising means for this exigency by taxes 



353 EXCHANGE. 

©r the sale of bonds, only, it contracted with manufactur- 
ers and producers for the articles needed and gave in pay- 
ment these promises. \ In other words it borrowed the 
ships, guns, ammunition, provisions, etc., in the first in- 
stance of those who produced them, and then to relieve 
them from carrying the whole burden of this loan, by the 
legal tender act, it obliged everybody to share it. All 
were compelled to accept greenbacks for whatever might 
be due them, and so every bearer of a greenback is made 
for- the time a creditor of the government. 

I A credit currency thus involves a violation of the 
laws of value and an inevitable disturbance of the com- 
merce and industries of a nation. It has also a demoraliz- 
ing effect on the honor and integrity of a people. \ The 
longer they are kept familiar with it, the more is the tone 
of moral sentiment among them corrupted. Austria pre- 
sents a sad example in point. We give the sketch as 
drawn by a trustworthy historian for the state of things 
in 1816. Though that state is in a better condition now, 
her moral and commercial character still suffers from the 
same malady. Thus we read : 

"Undeniably the paper money exercised the worst in- 
fluence on the m,orale of the people. Frugality and dili- 
gence were lost virtues. Vulgar pleasure-seeking and 
wild extravagance became habitual even in the lowest 
classes. Of what use to care for the future ? Why not 
enjoy to-day all the pleasures of the senses ? How could 
any one hesitate to pay two hundred gulden for admission 
to a ball ? In fact, the "money" had no value, and if 
one stood reflecting, he might lose ball and money both. 
The very fact of speaking continually of large sums, which 
however in truth amounted to but very small value, stim- 
ulated to frivolity and folly. So the ground was prepared 
for developing the celebrated ' Viennese ' disposition ; and 
the loafer-life in which the hot-spiced pleasures of the 



CEEDIT CUKKENCY. 353 

palate seemed the highest good, became indigenous to the 
unique city of the emperor." 

N^o thoughtful observer can fail to observe similar ten- 
dencies growing steadily stronger in our country, as our 
credit currency continues its presence and influence in the 
land. The act of a government creating such a currency 
is a direct interference with the rights of property and 
with the fundamental law of exchange, which requires the 
free consent of parties to all transfers, and the mainte- 
nance of contracts in full force. That act can be justified 
only by stern necessities, in circumstances which jeopard 
the nation's existence. "When the crisis is safely passed, 
the nation is under the highest conceivable obligation to 
bend all its energies to fulfill its promises, to relieve the 
general disturbance and distress, and to restore the bright- 
ness of its commercial honor, as speedily as possible. 



CHAPTER XXIII. 

FEEE-TEADE vs. PEOTECTION. 

r Definitions. As a term of Political Economy, 
Free-trade expresses the principle that a nation^ s wealth 
and prosperity are lest promoted hy securing the utmost 
freedom for the exchange of all commodities among its own 
people, and ivith the people of other countries. ^ 

As a term of the same science, Protection expresses 
the principle that in order to promote home-industry, the 
importation of certain articles from coiintries lohere they 
can he produced cheaper than at home, should he prohibited 
or restricted hy heavy duties. . 

From tlie bare statement of these principles, it is evi- 
dent that they are opposed to each other, propounding 
two distinct and conflicting economic systems. We have 
accordingly two schools of political economy in which the 
expounders of the science are classed as they advocate the 
one or the other of these principles. In practical legis- 
lation, also, two opposing policies corresponding to these 
two principles have been in conflict through all the history 
of our country. The issue may be best considered with 
the two principles distinctly before us. 

\ It is obvious also that the system of protection touches 
all of the four hranches of political economy. J/As propos- 
ing measures to stimulate home industry, it is directly 
concerned with the department of Production. As it 
aims to enhance the prices of certain commodities, it as 
directly aflects Consumption. As it modifies both private 
profits and public taxation, it comes into contact with the 



PEEE TRADE. 355 

laws of Distribution. And as it obstructs to some extent 
the freedom of commerce, it has to do especially with Ex- 
cliange. Such being the case, an advantage conferred by 
the systeto in one direction, may he offset by a disadvan- 
tage produced elsewhere. Hence, for the intelligent dis- 
cussion of the question before us, the elementary princi- 
ples of our science in all of its departments must be kept 
in view. We have therefore chosen this place for the 
treatment of this subject, after the presentation of the 
elements of our science under its several divisions. 

The Presumption is in favor of Free-trade. 

This appears from several considerations. 

1. For all economic processes and results, in their gen- 
eral aspect, the law of freedom is most favorable. This 
fact has come distinctly to view through all our previous 
discussions. Thus we have seen that for the "production 
of wealth, labor and capital meet most advantageously 
when each is free to apply itself to whatever industry 
promises the largest returns. Economy in the consump- 
tion of ivealth demands that all be free to purchase the 
means of gratifying their desires at the least expenditure 
of value practicable. The individual needs to buy where 
he can get the most for his money. It is equally for the 
interest of the community to bring its supplies from the 
cheapest market. We have seen too, thsit free competition 
is the grand regulator in distributing the proceeds of in- 
dustry to the parties concerned, so that the labor, the 
skill, the capital and the managing capacity shall each 
receive its due share. It has further been made plain that 
the ultimate disposal of products, through the processes of 
exchange is most profitable with the widest range of marhet, 
the freest channels of communication and the lest facilities 
for transportation. The interests of these several depart- 
ments of economic action are linked to2:ether and in the 



356 EXCHAIifGE. 

first aspect, the rule of freedom appears essential to the 
prosperity of all. 

2. The right of Property implies freedom for every one 
to do lohat he will with his own, provided he does not in- 
fringe the rights of others.. Any law restricting the free 
exchange of one form of property for any other, or its free 
transfer from one place to any other is " prima facie '^ a 
violation of a natural, universal, inherent right. Every man 
is entitled to use the products of his own labor as may 
seem most for his advantage, to exchange them with citi- 
zens of his own country or with foreigners, as he may get 
for them the largest compensation. The denial of this 
right or the interference with it by a government, bears a 
semblance, to say the least, of oppression, of robbery. 
The presumption is against it. 

3i Tlie Social Instincts of men prompt them to the 
practical adoption of this principle of freedom of exchange. 
A solitary settler in the wilderness reduces his wants to 
the minimum, and turns his hand to all sorts of occupa- 
tions to satisfy them, making himself hunter, fisherman, 
farmer, builder, blacksmith, and so on. When another 
joins him, a division of labor and free exchange begin. 
As numbers increase and a community is formed, diverse 
employments are more and more distinctly defined and 
distributed, mutual exchanges are multiplied, and both 
wants and the means of gratifying them rapidly increase. 
An impulse of our nature leads to the opening of com- 
munication with other settlements, and to the making of 
that communication as free as possible. Thus one after 
another, physical obstructions are removed, the winding 
trail gives place to an open road, bridges are thrown across 
the streams, steam supersedes sails for navigation, the 
locomotive and rail-car are brought in to shorten distance 
as measured by time, and the electric telegraph, set up be- 
tween different and distant localities, annihilates time and 



FREE TRADE. 357 

space and permits contracts and all operations of the com- 
merce of the world to be adjusted to present facts in all 
parts of the world. Every new discovery or invention 
which tends to increase freedom and facilities for ex- 
changes is hailed with Joy by all civilized people. The 
common sense of men, expressed by their instinctive 
action, thus pronounces universal freedom of trade a com- 
mon blessing. The civilization of the world seems to ad- 
vance in accord with this principle. Hence, the presump- 
tion that it is a wise and right principle. 

4. Free commercial inteixourse letiueen the nations of 
the earth tends evidently to establish their mutual relations ■ 
u'pon a basis of peace and good-tvill. By the mutual ex- 
change of values, different peoples become acquainted and 
assimilated with each other, and the feeling of interdepend- 
ence creates a common interest out of which grow the 
bonds of abiding friendship. Within the last two hun- 
dred years, international law has come to the dignity of a 
distinct science. Its development and growth have been 
coincident with the expansion of commerce under the im- 
proved facilities secured by recent inventions. The spon- 
taneous and necessary intercourse of nations originates in- 
ternational law, and leads to the establishing of rules for 
governing that intercourse. The more the principles and 
rules of this department of law are studied, the more 
clearly does it appear that through free commercial rela- 
tions, the separate interests of all nations are bound to- 
gether in one, so that each is concerned in the welfare of 
every other, and each is induced to place itself in an atti- 
tude of friendship, rather than of enmity towards others. 
Free-trade appears thus the promoter and pledge of peace 
in the world. The broad competition which it incites 
tends to swell the sura of human comforts and joys, and to 
impel every branch of the race to improve to the utmost 
the conditions of human living. 



358 EXCHANGE. 

5. The nations of men are of one Mood and constitute 
one family ; and all the face of the earth with its great 
diversity of resources and productio7is is given to the one 
human race. The blessings which the earth has to yield 
are developed in largest measure, as the people of every 
land devote themselves to the production of those forms of 
wealth for which their country is best adapted ; and the 
happiest distribution of those blessings is secured by inter- 
communication and mutual exchanges made as free as pos- 
sible between all nations. In the constitution of our 
nature, in the divine Scriptures and in the records of 
human experience alike, we read this fundamental, eco- 
nomic law. The enmities, the restrictions, the isolations 
which human selfishness has prompted and maintained are 
in violation of this law. The miseries consequent, 
under which the nations have groaned, are but the penalty 
of violated law. The broad philanthropy which Chris- 
tianity inculcates and aims to make universal for the 
world's emancipation from all evil, embraces this principle 
of freedom for trade. 

f In view of these things thus concisely presented, we 
are certainly justified in saying that in the issue before us, 
the presumption is strongly in favor of free-trade. On 
the advocates of Protection therefore is thrown the burden 
of proof for their principle of restriction. \ Let their argu- 
ments be fairly stated and candidly considered. 

Arguments for Protection. — These arguments 
concentrate on the promotion of home-industry, and vary 
only as they severally present different aspects of the lead- 
ing thought. It is said, 

1. Protection is necessary to secure that variety of in- 
dustry and that balance of different industries ivhich are 
essential to a feoyle^s prosperity. This is the broad propo- 
sition which underlies all, and in a sense, includes all the 



PK0TECTI0I3". 359 

^ines of argument adopted by the advocates of this system. 

'The proposition embodies two statements which are the 
premises of a syllogism. The major premise is that a bal- 
anced variety of industry is essential to a people's prosper- 
ity. The minor premise is that Protection is a necessary 
means to this varied industry. If both are established as 
sound and true, the conclusion follows that the protective 
policy is a necessary means of highest prosperity. ' 

(The first statement may be resolved into several jjar- 
ticulars to bring out its full force, as follows : ! 

a. ' Every country has a great vat'iety of resources, knd 
the development of all its resources conduces to its great- 
est wealth. 

b. Among the population of every country, there is a 
corresponding diversity of native talent,, and labor is most 
effective when every one has scope for doing that for which 
he is best fitted. 

c. 'The actual wants of men are equally diverse, and 
the highest happiness of a community depends on the 
degree in which all are provided for. 

d. \ A diversity of occupations makes a liome-marTcet for 
all sorts of products, saving cost of transportation^ favor- 
ing division of labor, and binding all classes together by 
ties of mutual helpfulness and common interests. 

e, .Varied industry favors tlie social and moral advance- 
ment of a people,^quickening and broadening minds, en- 
larging hearts and impelling to noblest action in the lines 
of rectitude and benevolence. 

We recognize all of these statements as elementary 
principles of our science which have come before us repeat- 
edly through our previous discussions. They need but a 
single qiuilification to secure universal acceptance. It does 
not follow from the general advantage of varied industry, 
that a people must always /^asi^e/i to develop every source of 
wealth existing among them, or maintain at all hazards, 



360 EXCHANGE. 

every possible form of industry, j In exceptional cases, a 
nation may have such peculiar Advantages for a certain 
kind of production, that its wealth vrill be most increased 
by concentrating its energies on that to the neglect of 
others. The people of Barbadoes have ample facilities for 
raising provisions, but they have much greater advantages 
for raising sugar. Therefore, it is good policy for them 
to produce mainly sugar, and get provisions by exchange 
from countries where the cost of raising them is greater 
even than it would be on their own soil. With this quali- 
fication, the advocates of free-trade not only admit the ad- 
vantages of varied industry, but magnify them in support 
of their own tlieory. i It is on the second premise that the 
real issue is joined. 

The affirmation is that protection is necessary to secure 
diversified industry. )The strong reason urged in support 
of this proposition is thus presented : " Foreign competi- 
tio7i crushes out the home production of all but the rudest 
and coarsest articles of manufacture, and prevents the es- 
tablishment of a varied industry, unless the government 
interfere^ as the personification of the nation, and its co- 
ordinating power, to restore the equilibrium by discour- 
aging imports." 

We may fairly ask how foreign competition is able to 
do this. The answer must be that in some other country, 
certain articles can be produced more cheaply than at 
home. We ask again, why their production costs less 
abroad. According to the principles of our science, the 
answer comes that it. must be on account of peculiar ad- 
vantages in three respects. Either the foreign country 
has superior natural resources, or it has wiore abundant 
capital, free to be employed in the contemplated indus- 
tries, or it has laborers in greater numbers and better 
skilled for the work to be done. The argument implies 
that the interference of government discouraging imports. 



PEOTECTION LAYS AJT UNEQUAL TAX, 361 

tends to counterbalance those advantages which the for- 
eign land possesses. We can readily see that it will do 
this, so far as those engaged in the protected manufacture 
are concerned. The action of the government forces up 
prices so that they can make the goods and realize a profit. 
But evidently, this is at the expense of the community 
generally. The duty is a tax laid upon the many for the 
benefit of a few. J 

For illustration, suppose that English broadcloth can 
be sold in Beloit, at five dollars per yard, but it will cost 
eight dollars a yard to manufacture cloth of the same 
quality here. To encourage home-industry, a duty of 
three dollars per yard is laid on all English cloths im- 
ported. This will prepare the way for that industry to be 
set up ; but plainly it is sustained only by a tax of three 
dollars a yard, paid by every one who wears broadcloth of 
either domestic or foreign production. The real benefit 
of this tax goes to the manufacturers. The case is the 
same as it would be if, without the duty, every man had 
been allowed to buy cloth at five dollars a yard, but had 
been obliged for every yard that he bought to pay three 
dollars to the home-manufacturer. This is a steady draft 
on the capital of the country — a burden laid upon the pro- 
ducts of otlier forms of industry. 

( To relieve this aspect of the matter, it is said that this 
burden is but temporary, and will be more than compen- 
sated by the greater ultimate benefits of a diversified in- 
dustry fully established. Protection is needed only to 
nurse our manufactures in their infancy, and to hasten 
their development. j After being thus supported for a 
time, they will grow strong enough to defy foreign compe- 
tition. (Then prices will be reduced, the tax can be 
removed and a lasting benefit will be realized. 

The question arises again how is this result to be 
brought about ? Eecurring to the laws of production with 



362 EXCHANGE. 

reference to the three particulars of resources, capital and 
laborers, it is quite evident that protection cannot add to 
the natural resources of a country, so as to put all coun- 
tries in this respect on a level. Protection can never give 
to France the coal-fields of England, nor furnish the 
prairies of Illinois with the water-powers that abound in 
New England, nor secure to Germany the facilities for 
raising cotton which the southern states of our republic 
enjoy. 

/ What protection does to accomplish the result claimed 
for it, must be then, through its effect on capital or labor. 
The enactment of a protective tariff obviously cannot 
create capital. Capital springs and grows only by industry 
and frugality. It is the fruit of saving. As products are 
increased and expenses diminished, there is a chance for 
adding steadily to capital the difference between wealth 
consumed and wealth produced. But, as we ha,ve seen, a 
protective tariff enhances the price of certain articles of 
general consumption, [it may touch the materials of in- 
dustry ; it may touch things necessary to the support of 
laborers. Just so far as it does this in either direction, it 
increases the cost of production and the.,cost of living, and 
thus diminishes the chance for saving. ) It makes capital 
less effective except in the line of the protected industry. 
The capital of the community generally is impaired, not 
strengthened. 

Much the same thing must be said of the effect of this 
policy on labor. Legislation has no power to create men. _:i 
The natural increase of population depends chiefly on the 
means which a country possessed for the support of a popu- 
latian, and the facilities it offers for the accumulation of 
wealth. Where the necessaries of life are abundant, and 
there is free scope for profitable employment, large fami- 
lies are raised. The same considerations constitute the 
chief attraction to draw in foreign laborers. Men emi- 



PKOTECTION CHANGES THE DIKEGTIOK OF INDUSTEY. 363 

grate to better their condition. • The first effect of protec- 
tion is simply to concentrate labor on one employment, and 
to lay a special burden on all others for the benefit of the 
favored occupation. Nominal wages may thus be raised, 
but real wages are reduced by the enhanced price of the 
necessaries and comforts of life. This means that the 
stimulus to labor generally and its efficiency are impaired. 

( The advocates of protection in their reasoning, seem to 
lose sight of the fact that this policy can do little more than 
to change the direction of both capital and labor. , When 
articles of foreign production are imported, they are to be 
paid for by the products of home labor and capital, and 
the question of economy is, which is the cheapest — which 
will bring the largest returns for a certain amount of labor, 
to make these articles ourselves or to make something 
else with which to buy them ? Left free from government 
interference, home labor and capital will lay hold of what- 
ever natviral resources a country possesses, and with refer- 
ence to both home wants and foreign wants, produce the 
things most feasible and desirable, at the cheapest possible 
rates. The surplus of these products will pay for the for- 
eign goods purchased. Intelligent judgment and free 
choice determine the direction given to capital and labor, 
to establish those industries which are most advantageous. 
But protection comes in to overrnle this spontaneous 
action. It assumes that a government can judge bettei 
than themselves what is for the people's advantage, and so 
dictates a diversion of capital and labor to new employ- 
ments. Such a change is in itself a disadvantage. It 
invplves more or less loss of capital and of skill in labor. 

/ The protectionist says, " Nobody asks that protection 
as a system shall be permanent.^^ Yet it is an incontro- 
vertible fact that in the history of protective legislation, 
no '• infant industry" that has been nursed by this policy 
has ever grown to such maturity of strength and self-sup- 



364 . EXCHANGE. 

port as to be ready, voluntarily, to dispense with the help- 
ing hand of law and face foreign competition in its own 
strength alone. The English landholders clung to their 
corn-laws to the last. The iron manufacturers in our 
country have at times, under high tariffs, done extensive 
business and made great profits, but they have kept up the 
prices of their product and always resented every proposed 
reduction of the duty. Is not this fact a virtual confes- 
sion that '^Protection fails to protect," that this interfer- 
ence of government to direct the industries of a people 
fails of its aim ? 

But against the assertion that protection is necessary 
to develop varied industry, it may be positively affirmed 
that there is a better and surer ivay of reaching that result. ) 
Where no interference or obstruction is allowed, there 
comes a spontaneous development which is safe and con- 
stant because it is in accordance with nature's law. We 
may unfold the thought in a few distinct yet connected 
propositions as follows : 

a. There is a natural grotvth of human industry, the 
laws of which are as fixed and certain as those which per- 
tain to the growth of vegetation. ; 

I b. Free competition is the healthy stimulus to that 
growth. ^ 

c. Under the natural law of development, industry 
will be applied to the several native resources of a country 
as fast as the increase of labor and capital will warrant. ' 
^ d. Men^s instinct for accumulation following diverse 
individual capacities, tastes and predilections, is the safest 
guide to determine the order in which labor and capital 
shall be applied to those various resources, "j Under it, 
whatever promises a profit will be undertaken as soon as it 
can be without sacrificing a greater profit elsewhere. 

e. The attempt to force labor and capital into certain 
employments before their time, deranges the order of 



PEOTEOTION PAYORS ISTATIOSTAL INDEPElfDENCE. 365 

nature and produces reactions which hinder the desired 
result. ' 

/.; At any stage of this development, if exchange is 
ivee, foreign products are purchased with the fruits of a 
people^s most efficient lahor> that is, with those articles 
which they can then produce to the best advantage ; 
which they can best afford to part with, because they are 
obtained at the least cost. By all such advantageous 
trade, capital, the prime element of varied industry, is in- 
creased and labor is sustained. 

^. When by this natural progress, a people come to 
take up a new industry for which they have natural advan- 
tages and God-given capacity, no foreign competition can 
crush it, for even in its infancy, it is charged with the 
nation's life and strength. 

h. An industry which is not indigenous, which has no 
natural advantages, or which is prematurely set up and 
fostered by artificial means, can have only a sichly, uncer- 
tain life, and is supported at a wasteful expenditure of a 
nation's resources. J 

/ 
2. j It is strongly urged as an argum.ent for protection, 
that it is a necessary means of maintaining national inde- 
pendence. ] This is a very specious argument, because the 
term national independence has a patriotic ring to which 
the popular ear and the popular heart are peculiarly sensi- 
tive. But as used in the proposition before us, it simply 
covers a subtle sophistry and makes it pass for sound rea- 
soning. (For an individual and for a nation, there are two 
kinds of independence. !One may withdraw from his fel- 
low-men to a cave in the wilderness and in contact with 
none else, keep himself alive and possibly find interest and 
enjoyment in a hermit life. He may glory in his inde- 
pendence. But is there anything noble in such isolation ? 
Is it the way for a man to make the most of himself ? Is 



366 EXCHANGE. 

this the kind of independence which young men should be 
taught to aspire to and maintain ? The independence of 
genuine manhood is of another sort. It is individuality 
of capacities, acquisitions and character which is able to 
stand on its own basis in full and free relations with fel- 
low men. It is, in the midst of society, a distinct person- 
ality, giving and receiving, supporting and supported, 
blessing and blessed through the varied intercourse which 
nature prompts and by which the completest development 
of the man and of the race is advanced. 

i The same distinction is to be recognized with respect 
to nations. There is an independence of isolation such as 
China and Japan, until recently, maintained — such as the 
despot Francia attempted to secure for Paraguay, when he 
stopped all ingress and egress, held the shipping in the 
river till it rotted and fell to pieces, and compelled his 
people to restrict their desires to those things which they 
could produce for themselves. But that independence 
which is the strength and glory of a nation is of another 
kind. It is an individuality of national resources and 
character which stands up in the full brotherhood of 
nations, and in the consciousness of its own strength enters 
into all offices of mutual dependence through which nations 
grow and civilization makes progress, ) 

' The policy of protection fosters the narrower kind of 
independence. It is a restrictive policy. ■ Carried out to 
its logical conclusion, according to its manifest tendency, 
it leads to isolation, i The sophistry referred to consists in 
the concealment of this fact, while the term '•' national in- 
dependence " is used in its broader, nobler sense. To link 
protection as a cause with sach independence is a pure as- 
sumption, false and deceptive. 

In an economic point of view, the real independence of 
a nation is commercial independence. That is reached and 
secured, as. a people, by the development of their own 



ARGUMENTS FOR PROTECTION". 367 

resources, are able to provide for themselves, in part by 
their own productions, and for the rest, by commanding 
the needed productions of other nations, by offering in the 
market of exchange, what other nations want. The basis 
of such independence is the home production of wealth. 
But the way to increase wealth is to use to the best possi- 
ble advantage the gifts of nature, and then, in the world's 
great mart, sell where things can be sold on the best terms 
and buy where things can be bought on the best terms. 
That nation is strongest and most complete in her inde- 
pendence, which can open most freely every avenue for the 
wealth of the world to flow in upon her, because, as the 
fruit of her own vital energies, freely exerted, she has 
wealth in abundance to give a fair equivalent. 

A nation comes to this full maturity by a steady nat- 
ural growth, just as a child comes to full manhood. In 
both cases, freedom is the law of growth. The old myth- 
ology tells us that once the head of Zeus was opened, 
and there leaped forth into the world a virgin full grown 
and full armed. But not even in myth or legend, do we 
read of any nation thus born in full maturity of strength. 
The effort by protection to hasten a nation's independence 
is like binding an infant's limbs in splints, that it may 
sooner stand alone. The artificial appliance may develop 
prematurely a single function, but it is at a wasteful 
expense of general vigor, and is quite sure to induce 
chronic weakness and deformity. 

The presentation of these two arguments has covered 
nearly the whole ground of the discussion, and brought 
into view the leading points. A few words will suf- 
fice to dispose of what other arguments we need to 
notice. 

/ 3. The adxKintages of a home-market for agricultural 
products are often urged in favor of the protective system. 



368 EXCHANGE. 

Certainly it is an advantage to a farmer to find in a man- 
ufacturing village near, a market for his produce. ' It will 
save him a part, at least, of the cost of transporting it to 
the distant commercial city. But if this market is made 
and sustained for him by a protective tariff, he must pay 
for tools, for salt, for dry-goods, for all the manufactured 
articles he needs, from twenty to fifty per cent more than 
they would cost him under the rule of free-trade. May 
not this offset all the gain on the other side ? 

The assumption , that protection creates the home- 
market is a fallacy. These centres of varied industry 
grow up naturally and healthily with the increase of popu- 
lation and wealth. Mechanical genius, the investigating 
turn of mind, the energy of will-power, managing capa- 
city — these qualities come not of protective tariffs. They 
are the gifts of God to men. Left to themselves, they go 
out spontaneously to lay hold on all gifts of God in nature, 
and using all available capital, set up the workshops of 
industry, and bring out the treasures of wealth in ever- 
increasing measure, 

f Furthermore, the term " home-market " has force in 
this discussion, only as it implies the production at home 
of all mamifactures wanted and the consumption at home 
of all agricultural produce raised — a condition of things 
attainable, if at all, only after the lapse of centuries.J 
Meantime, a people must buy the things they cannot pro- 
duce, by selling the surplus of that which they can pro- 
duce. For a long time to come, this country will have a 
large surplus of breadstuffs, cotton, petroleum, silver and 
gold to dispose of. We can sell to others only as we give 
others a fair chance to sell to us. Domestic commerce and 
foreign commerce are necessarily interlocked. The prices 
of agricultural produce in our home-markets are deter- 
mined by the prices in markets abroad. Where trade is 
freest, the prices will on the average be the best. Hence, 



AEGUMENTS FOR PROTECTIO:iSr. 369 

free-trade is the essential condition of a sound and KeaWiy 
home-market. 

4. It is said that the free introduction of foreign 
fahrics teiids to bring our Americati laborers doivn to the 
level of the "pauper labor ^' of the old loorld. The expres- 
sion "pauper labor " suggests something frightful to inde- 
pendent freemen, and hence with our common people, this 
plea is probably more effective than any other ; but a few 
simple facts take away the point of this argument. - The 
laborers in England, which is the old country chiefly 
referred to, who are the lowest in the scale of living, are 
those engaged in agriculture. Our agricultural laborers, 
though they have no benefit from protection, may safely 
defy their competition. ; The nominal wages of skilled 
labor employed in manufactures in England, are lower 
than those of the same class in this country. But careful 
inquiry shows that the low wages of the English artisan 
will go quite as far as the higher rates paid here in secur- 
ing the necessaries and comforts of life. The competition 
then, is unequal only in appearance. It can have no 
effect to degrade our working-men. If our protective 
duties were removed, wages might decline in full propor- 
tion. Even if the case were as strong as the argument 
implies, the low wages of foreign labor would be of advan- 
tage to all consumers at home, including our laborers. 
We should get certain articles all the cheaper, and our 
labor devoted to other forms of production for which we 
have advantages, would bring larger returns through the 
exchange. 

5. It is said again that protection is necessary to the 
development of skill in manifactures. .'We may turn the 
previous argument to meet this. So long as wages are 
higher in our country than abroad, they will bring over to 

16* 



370 EXCHANGE. 

our aid the best acquired skill of the old world. For the 
development of advanced skill and the invention of new- 
devices, free, sharp competition is the highest stimulus. 
Protection interferes with this and thus removes the spur 
to best endeavor. 

/ 

6. ^Protection is often advocated as a means of Retalia- 

tion.\ A nation will not fully receive our products and we, 
in order to punish her and oblige her to change her policy, 
refuse to receive hers. This certainly is not a virtuous nor 
an honorable motive to action in either an individual or a 
nation. Eetaliation is not generally wise, since in the hot 
spirit of vindictiveness, it prompts men to measures whicli 
are likely to injure themselves as much as their opponents. 
A worthy example of self-reliance and manly generosity 
will be more effective to lead another country to change 
her policy, than any threat or act of retaliation. If the 
narrow policy of another nation excludes our products, so 
that we cannot trade directly with her, it may yet be both 
feasible and profitable to procure her products by means 
of a double exchange through a third country. We surely 
injure ourselves when we pay five dollars for an article 
which we could just as well get for three. 'There is no 
profit in the mere gratification of spite. ) 

7. ■ // may he asked, if the policy of protection is so un- 
reasonable, hoiv is it that so many men of clear intellect and 
practical luisdom ai^prove and maintain it, and that, 
through the centuries past, it has been by the nations so 
generally adopted ? j The question is well answered by the 
French economist Bastiat, in a paper entitled "That 
which is Seen and that which is not Seen," in which he 
shows that protection is maintained principally by a view 
of what the few producers gain and a concealment of 
what the many consvimers lose ; and that if the losses of 



AKGUMEilTS FOK PROTECTION. 371 

the million were as patent and palpable as the profits of 

^.the few, no nation would tolerate the system for a day, 

' The apparent benefit of protection is concentrated and 

strikes the eye at once, while its evils are widely diffused 

and escape notice except on thoughtful investigation. 

The theory of protection indeed, comes to us, an in- 
heritance of the past, supported by a kind of prescriptive 
riglit from long usage. But tracing it back we find its 
origin in the old doctrines that nations are natural ene- 
mies to each other, that in every profitable exchange, 
" What one man gains must be another man's loss." that 
commerce can benefit one country only as it injures 
another, and that a nation's wealth is increased only as 
money is brought in and held fast. \ These false doctrines 
led to the most harassing restrictions on all commercial 
intercourse. The different trades were organized as rival 
guilds, each fenced I'ound with secrets and endowed with 
peculiar privileges. Tolls were collected at every city's 
gates on all goods brought in. Each nation sought to 
build up its own industry by breaking down that of 
others. Strange enactments were made to favor particular 
manufactures. Thus to protect tlie woolen manufacture 
in England, it was ordained that no man might buy wool 
within fifteen miles of the sea without permission of the 
king, and that every corpse should be buried in a woolen 
shroud. Not a century and a half ago, a great statesman 
of England said in the house of Lords, •' If our wealth is 
diminished, it is time to ruin the commerce of that nation 
which has driven us from the markets of the continent, by 
sweeping the seas of their ships and blockading their ports." 
Happily, with the advance of civilization, other and better 
views have supplanted those old doctrines and the absurd 
regulations have, for the most part, disappeared from the 
statute-books. The protective system, however, still lin- 
gers, the last phase of feudal isolation, and, strange to say. 



"372 EXCHANGE. 

rules with strongest sway the policy of our free republic. 
How long shall it resist the spirit of liberty and fraternity 
which is rallyiiig all nations to mutual good-will and 
cooperation ? 



Positive Objections to the system of Protec- 
tion. — From the actual operation of the system, evilspro- 
ceed which expose its inherent impolicy and injustice. 
Here we deal with plain facts. 

1. Protection introduces and fosters antagonism between 
the different industries of a country. The idea of giving 
protection to every branch of industry is absurd. The 
theory implies special encouragement to the production of 
certain articles. But when government interferes to favor 
one industry by raising the price of its products, it taxes 
all other interests. The duty on foreign coal is a benefit 
to those who work our coal-mines, but an injury to every 
manufacturer who uses coal. Hence collision of interests 
between the producers and the consumers of coal. The 
wool-grower finds that the duty which protects the 
woolen manufacture increases the cost of his clothing, 
while the competition of cheap wools from abroad keeps 
down the price of his product. He applies for protection. 
But if granted, this will reduce the manufacturer's profit, 
and he protests and resists. Thus two parties whose in- 
terests are really one, are set against each other in a con- 
flict injurious to both. The boot and shoe manufactures 
of our country, through the Yankee genius for invention, 
with no special protection, grew naturally into one of our 
most profitable branches of industry. But a duty laid on 
leather and hides, for somebody's protection, robbed our 
manufacturers, in part at least, of their rightful advantage 
in the world's market. The main point of our objection 
is very clear in the case of the duty on foreign steel, as 
presented by Mr. Amasa Walker. •' The whole num- 



OBJEOTIOKS TO PEOTECTIOIT. 373 

ber of persons engaged in the direct manufacture of 
steel in the United States, as the special Commissioner of 
Eevenue informs us, does not exceed three thousand five 
hundred ; while the number of those who use steel as 
a raw material for the manufacture of axes, chisels, files, 
cutlery, spades, shovels, pistols, machinery and other 
tools and implements, is not less than two hundred 
thousand ; while an addition of those indirectly inter- 
ested in having cheap steel would swell this number to 
one million, five hundred thousand."j' In this case, the 
few more easily combine to perpetuate their advantage, on 
account of each one's large and immediate interest ; while 
the disadvantage is distributed in smaller proportions to 
the many and their eyes are only half opened to discern 
its measure and its cause. But the conflict begins to be 
defined and the issue must in due time be joined. 

^l^ TJie unnahiral stimulus given hy protective legisla- 
tion leads to over-production and consequent stagnation 
and failure.] The first effect of a high duty is to raise 
prices and so to increase the profits of the protected indus- 
try. Men eager to get this advantage turn capital and 
labor into this form of production and push their business 
with great zeal. Old establishments are enlarged, new 
establishments are hastily and ignorantly set up. They 
are run by untried managers, worked by inexperienced 
hands and turn out an imperfect product in great profu- 
sion, till the market is glutted, prices decline and the end 
is stagnation, and with many bankruptcy. (All this was 
strikingly illustrated by facts in the manufacture of paper. 
During the late war, a heavy duty was laid on the import 
of paper, and at the same time, the demand was greatly 
increased. The price of the article rose rapidly, yielding 
extraordinary profits to the mills already established. 
This led to the enlargement of the old mills, and a host 
of new men rushed into the business. Dunnsf the vears 



374 EXCHAITGE. 

1864-6, just as the war was closing, more paper-mills were 

set up than during the twelve years previous. As a conse- 
quence, the market was over-stocked just as the special 
demand ceased, prices fell and general stagnation followed ; 
and when in 1869, a great freshet in Massachusetts swept 
off a number of these mills, a journal devoted to the ad- 
vocacy of protection said, '•' This disaster will work to 
the advantage of those who escaped the flood, and we 
doubt not that those mills that did stand will do a better 
business in consequence of the lessened supply." ' Surely 
there must be something wrong in a policy which causes 
the sweeping destruction of property to be regarded as a 
public blessing. We find a fit counterpart to this fact in 
the salt-manufacturers of Ohio, who in order to keep up 
their profits united to lease the Kanawha salt-works of 
Virginia, with their superior facilities, only to close them 
up and forbid competition from that quarter. No branch 
of industry has been more clamorous for protection than 
the iron interest. None has been more constantly favored, 
and in none have these fluctuations been greater. As the 
vear 1878 opens, it is prostrate. The diagnosis of the case 
by the economic physician declares it '' sicktvell nigh unto 
death by reason of excessive protection." 

3. [Protection diminishes the legitimate revenues of the 
government, at the same time that it lays a heavy tax on 
the people. A government must be sustained by revenues 
derived from taxation. The imposition of equitable 
duties on imports is admitted by the advocates of free 
trade as a legitimate mode of raising a revenue. A strictly 
revenue tariff has no disturbing influence on trade, nor 
does it conflict with the free development of a nation's 
varied industry. But a protective tariff has another end 
in view. That end would be most fully attained by duties 
high enough to prevent altogether the importation of cer- 
tain articles. If it attains its end in any degree, it must 



0BJECTI0]!5"S TO PEOTECTIOIn. 375 

restrict importations. In either case, it reduces the reve- 
nue actually derived from this source. Meantime, the 
whole community is taxed by the extra thirty, sixty, or 
whatever per cent is added to the price of every yard of 
silk, and every pound of iron, etc., consumed. 

If therefore, it were wise for the government directly 
to encourage particular industries, a system of Bounties 
would be far more economical than that of a protectiye 
tariff. If foreign silk can be sold in our market for three 
dollars a yard, while it costs five dollars a yard to produce 
an article of the same quality here, a bounty of two dol- 
lars a yard, paid by the government to the home-manufac- 
turer, will put him on a level with the foreign manufac- 
turer. The people then, can buy all the silk they need at 
three dollars, choosing freely between the home and the 
foreign product. Consumption is not diminished by an 
enhanced price, and the only public burden involved is to 
provide for the bounty on the home product. Every dollar 
of the tax drawn from the people goes directly to its object. 
In such a case however, it would be clearly seen just what 
the artificial stimulus to the silk manufacture costs ; and 
this is the chief reason why the system of bounties is not 
employed. The inequality and injustice of the jDrinciple 
common to both this and the protective system would be 
too apparent to be long tolerated. 

4 The policy of protection, in its application must he 
unstable, disturhing the course of industry hy frequent 
changes. /This follows inevitably from the conflict of in- 
terests referred to. As soon as a high duty on iron shows 
its effects in prices, all who use iron as the material of 
their industry begin to clamor for a change of the tariff in 
that particular. Again, the advantage which protection 
gives is eagerly sought by all. Hence on the one side, a 
pressure to extend the tariff-list, is resisted on the other by 
an effort to make the singular privilege exclusive. Under 



376 EXCHANGE. 

these influences, it is impossible to settle an order which 
shall be permanent. It is a historical fact that scarcely 
a session of our Congress passes without attempts to change 
the tarifE./ (It never is nor can be made satisfactory to all. 
This changeful legislation works disaster on particular en- 
terprises, and throws uncertainty into all arrangements 
and plans of business. A protective tarifE can never be 
made fair and equal to all, for its fundamental principle 
is an unjiist favoritism against which those not favored 
instinctively protest and contend. 

5. \Protection tends to demoralize our national legisla- 
tion. The so-called " lolhy influence " at Washington has 
become proverbial. It is an influence which works to 
carry through enactments of law by regard to private in- 
terests, rather^ than to principles of right applied to the 
public weal. The lobby is thronged with representatives 
of certain manufactures seeking to obtain or to perpet- 
uate Special protection. 1 They use money freely, not per- 
haps in the way of direct bribery, but in a way to work 
influence. The consequence is that, to a great extent, 
legislation on the tariff is determined by the bearing of 
certain measures on a pending election, or on interests 
which especially concern the constituents of congressmen. 
Bargains are made to combine the friends of separate 
measures, when votes are given. This mode of disposing 
of questions becomes habitual. It opens the door for 
subsidies and other corrupt measures. All proposed acts 
come to be judged of not by their real merits as right 
and good for the state as a whole_, but by their relation to 
personal emolument, place and power. Genuine states- 
manship is thus over-ruled and degraded. We do not 
charge these tendencies wholly on protection. But it is 
evident to every careful observer that these corrupting in- 
fluences are the natural outgrowth of this policy, and con- 
centrate around the measures which it dictates. 



HISTOEICAL RESULTS. 377 

6; Protection tends to corrupt tJie public morals and the 
public service.' It offers strong temptations to the viola- 
tion of law by smuggling. J Against this temptation, the 
consciences of men oppose but slight resistance, because 
the tariff law rests on no grounds of absolute right. On 
the contrary, it is easy for men to persuade themselves 
that these enactments are unjust. Eespect for the law 
and its force, as a rule of action generally, are thus im- 
paired. The nice sense of honor and right is deadened 
and the making of false invoices, the swearing of false 
oaths and direct bribery at the custom-house are regarded 
as venial sins. (Very naturally, government officials are 
drawn into direct collusion and partnership with these 
crimes and betray the sacred public trusts with which they 
are charged. , The corruption which thus attends the col- 
lection of duties at the port of New York is notorious. 
For many months, honest importers have been compelled 
to abandon the attempt to bring in foreign silks, paying 
full duties, because the market is full of smuggled goods. 
The same thing is true of many other articles on which 
the duty is high. The Hercules who is equal to the task 
of cleansing that Augean stable, by some measure of 
" civil service reform " has not yet appeared. The evil is 
so inherent, that we have reason to believe it cannot be 
eradicated except by the overthrow of the system ; mean- 
time it is diffusing a subtle moral poison through our 
whole body politic. 

i We may conclude this discussion with a few words 
respecting Historical Results, often brought forward 
with confidence by the advocates of protection. The his- 
torian Fronde says " It often seems to me as if history was 
like a child's box of letters with which we can spell any 
word we please." In the use of this kind of argument, 
there is constant danger of running into the logical fallacy 



378 EXCHANGE. 

of '* non causa pro causa " — of giving a mere coincidence 
the force of a cause. The remark is especially true con- 
cerning the subject before us, because what seems like a 
state of industrial and commercial prosperity is often illu- 
sive, and where it is real, it is the effect of many causes 
combined, or the resultant of opposing forces. Thus the 
wonderful activity of business in our country just after the 
late war closed, was generally considered as betokening 
sound prosperity. Later experience has shown that the 
nation was then acting under the wild delirium of a burn- 
ing fever. 

It is a fact that the Jewish money-lenders in mediaeval 
times, grew rich and thrived when persecuted^ defrauded 
and oppressed without mercy by kings and feudal lords. 
Shall we say that their wrongs were the cause of their 
thrift ; or that by their persistent energy under the passion 
for gain, they grew rich in spite of oppression ? So als© the 
industry and commerce of European cities from the twelfth 
to the fourteenth centuries steadily increased amid hostile 
rivalries between themselves, narrow restrictions on con- 
flicting guilds and constant exposure to plunder by robber 
barons. It would surely be a mistake to say that the sub- 
jection to these rivalries, restrictions and robberies was the 
cause of their prosperity, vlt is a fact that in England, 
the protective policy has been till within the last forty 
years, persistently and vigorously maintained. It is also a 
fact that while this policy prevailed, England grew in 
wealth and power through her manufacturing and com- 
mercial industries. But does the coincidence of these two 
facts in time establish the relation of cause and effect 
between them ? \ The truth is that where there are large 
material resources in a country, and vital energy in its 
people, industry will develop wealth in spite of all obstruc- 
tions, just as from the vital force of an acorn dropped into 
a cleft of the mountain, will spring the oak, in its steady 



HISTOEICAL RESULTS. 379 

growth rending the rocks that cramp its roots, and defy- 
ing the whirlwinds that twist and strain its gnarled 
branches. 

Until within tlie last half century, the protective policy 
has ruled the industry of the world. Free trade has had 
scarcely a chance to try its experiment. Yet its princi- 
ples have been clearly illustrated and sustained in the hun- 
dred years' history of our nation's independent life. ,^ The 
states of our republic, in their extent of territory, their 
diversity of resources, the varied races and endowments of 
their population and their distinctive interests, constitute 
a world by themselvesl ' Fortunately, our constitution for- 
ever forbids the protective policy to restrict their trade with 
each other.' A broad arena is thus presented for the ex- 
periment of free trade. For nearly forty years, we have 
watched the course of that experiment in the unfolding 
growth of the young state of Wisconsin. Her main in- 
dustry was at the first and must long continue to be agri- 
culture. But as population has poured in, and agriculture 
has yielded a surplus of home-capital, and a basis of credit 
has been laid for the introduction of eastern capital, every 
kind of industry suited to her climate and conditions has 
been successfully established. Her mines have been 
worked, her water-powers have been utilized, villages and 
cities have sprung up spontaneously, and the diverse gen- 
ius and taste of her sons have found at home ample scope 
and stimulus for profitable exercise. According to the 
theory of protection, the competition of New England 
manufactures, brought in freely by the best facilities for 
transportation, should have precluded the making of like 
products here. But the facts are all against the theory. 
We have seen woolen factories, cotton factories, shoe fac- 
tories, watch factories, iron works, machine shops, paper 
mills, establishments for making agricultural instruments, 
etc., all started, on a comparatively small scale indeed, but 



380 EXCHANGE. 

with a success and prosperity that promise to be abiding 
and expanding. This is the result of a brief but fair ex- 
periment of the principle of free trade. It confirms every 
phase of the theory and shows that what is philosopMcally 
sound and true is also practically safe and luise. 



CHAPTER XXIV. 

RAILWAY CORPOEATIONS. 

The operations of exchange are aided by all facilities 
for free communication and for the transportation of per- 
sons and goods between different sections of a country and 
different parts of the world. Steamships and ocean tele- 
graphs have changed the methods of foreign commerce. 
Domestic trade and industry have been yet more affected 
by the modern system of Railway transportation. The pen 
of an eminent jurist has set forth with both truth and elo- 
quence the benefits derived from this means of swift pas- 
sage. "Railroads," says Judge Paine, "are the great 
public highways of the world, along which its gigantic 
currents of trade and travel continually pour — highways 
compared with which the most magnificent highways of 
antiquity dwindle into insignificance. They are the most 
marvelous invention of modern times. They have done 
more to develop the wealth and resources, to stimulate the 
industry, reward the labor and promote the general com- 
fort and prosperity of the country, than any other or per- 
haps all other mere physical causes combined. There is 
probably not a man, woman or child, whose interest and 
comfort has not in some degree been subserved by them. 
They bring to our doors the productions of the earth. 
They enable us to anticipate and protract the seasons. 
They enable the inhabitants of each clime to enjoy the 
pleasures and luxuries of all. . . . There is scarcely 
a want, wish or aspiration of the human heart which they 
do not in some measure help to gratify." 



382 EXCHAlifGE. 

But eyery power for good may be abused and perverted 
into a power for evil. Experience reveals a tendency in 
great railway corporations to acquire and to exercise des- 
potic power, in a way to obstruct trade and to bring a 
blight upon productive industry — a power which sometimes 
aims by base means to control legislation, and sometimes 
attempts to defy the law. Grave and complicated prob- 
lems are thus presented which need to be studied in the 
light of economic principles. Our science has certainly 
something to contribute towards the practical solution of 
these problems. 

The Nature of a Railway Corporation. There 
are to be recognized three distinctive features. 

I 1. Such a corporation is a Creature of the State. It 
originates in a legislative act. This must be so for three 
reasons. First, because it is peculiarly a function of the 
State to provide highways of travel and trade for the gen- 
eral benefit of its people. Second, because the making of 
such highways involves an interference with private prop- 
erty which can be warranted only by the authority of the 
State in the exercise of its sole right of ''eminent doinain" 
for a public advantage. And Third, because the con- 
struction, equipment and operating of an extended railway 
is an operation of such magnitude as to require the capital 
and energies of many to be combined. ' 

2. Such a corporation is an Agent of the State. The 
considerations just named would justify the government 
of a State in taking upon itself to provide and manage 
railways for the public good. Belgium and some other 
European states do thus entrust this entire interest to the 
direction of government officials. But the policy of our 
government is, in accordance with the economic principles 
heretofore presented, to enHst private enterprise as far as 
practicable in all undertakings Avhich directly concern in- 



EAILWAY CORPOEATIONS. 383 

dnstry and trade. Accordingly in the legislative act which 
creates a railway corporation,, tiie government does two 
things. First, it constitutes of a number of associated 
individuals an artificial person with a distinctive name, to 
act by one united will, capable of receiving, holding and 
conveying property, of entering into contracts and incur- 
ring debts, of suing and being sued. ' The body corporate 
thus formed, is in the eye of the law, a civil person possess- 
ing certain rights, enjoying certain privileges and exercis- 
ing certain functions for a specific object. Second, the 
government transfers to this body corporate certain of its 
own sovereign powers, especially that of eminent domain, 
that is the power to take private property for public use 
on making due compensation to the owners ; and charges 
it with the fulfillment of its own legithnate functions, 
namely, providing the public with facilities for the trans- 
portation of persons and goods. J The powers are granted 
with reference solely to the function contemplated. A 
decision of the United States Supreme Court declai-es that 
"building a railroad, though it be built by a private cor- 
poration, is an act done for a public use," and again "in 
their very nature railroads are public highways." Chief 
Justice Shaw, of Massachusetts, says, " the real and per- 
sonal property necessary to the establishment and manage- 
ment of a railroad is vested in the corporation, but it is in 
trust for the public." It is therefore, as an agent of the 
State, that a railway corporation takes land from its citi- 
zens and establishes a highway of intercourse and commerce 
for the public service. Hence in the very nature of the 
case, its powers and vested rights cannot be held and exer- 
cised independently of the State. The government is 
false to its own sacred trusts, if it does not hold such cor- 
porations ever responsible in all respects for their conduct 
in the discharge of their proper functions. 

3. A railway corporation is in some degree a practical 



384 EXCHAKGE. 

Monopoly. The private enterprise which undertakes, as 
an agent of the State to perform the service named, is en- 
titled to a just compensation. The members of the com- 
pany invest their capital for expected profits. Their pri- 
vate interests are to be carefully conserved. The corpora- 
tion gets its compensation by collecting fares and freight 
charges for the actual transportation of persons and goods. 
That is, as an offset for the service rendered, the govern- 
ment allows a private company to tax the public who have 
the benefits of that service. But after a railway is once 
established, it controls the business of transportation for 
the section through which it runs. The only competition 
possible is that of parallel railways or water transportation. 
Hence the arrangement itself gives to the corporation a 
practical monopoly with the power of taxing the com- 
munity. 

(^ This is proba,bly the best way of making remuneration 
for the service.; If the government performed the same 
service by a bureau of its own appointed officers, it would 
tax the community in the same way. There is no just 
ground for complaint of this monopoly as a method of pay- 
ing for a valuable service ; nor of its legitimate exercise to 
secure generous returns for capital and labor employed. 
But it is evidently liable to abuse. \ The government has 
need therefore, to subject the business to reasonable condi- 
tions and to retain such power over it as to guard the pub- 
lic against oppression. \ Mr. Mill very fitly says, " the 
State should either reserve to itself a reversionary property 
in such public works, or should retain and freely exercise 
the right of fixing a maximum of fares and chai'ges and 
from time to time varying that maximum."; 

While railway corporations are creatures of the State, 
called into being to serve as agents of the State for the 
accomplishment of certain purposes, they are also to be 
regarded as parties to contracts with the State, entitled to 



RAILWAY CORPORATIONS. 385 

just reward for their services, and having prwafe riglits 
and interests always to be respected and guarded. On 
the part of the State, the object distinctly contemplated 
is to develop the material prosperity of the people. On 
the part of each corporation, the object never lost sight of 
is to realize a profit for the capital and labor which it em- 
ploys. These two objects are not necessarily opposed to 
each other. On the contrary, each is best promoted when 
qualified by respect for the other. ) This will appear more 
clearlv as we study next, 

r " ■ " 

The Relations of Railway Corporations to 
general Industry. 

1. By transportation, they give to all products that 
last addition of value which comes from their being in the 
places where they are most needed. They directly perform 
a kind of labor essential to the increase of wealth. The 
importance of this labor cannot be over-estimated. It links 
itself with every other kind of labor and is necessary to de- 
velop the full results of all industry. 

2. They enlarge the market for all products, and so 
help to maintain the natural equilibrium of supply and 
demand. '■ They bear away the surplus productions of one 
section to meet the deficiencies of another, to the relief of 
both ; and the industry of both is thereby stimulated. 

3. They quicken exchanges and thus hasten the returns 
from both capital and labor. Hence they tend to reduce 
prices, and at the same time to make them more remun- 
erative. 

^.\The business of the raiUuays depends upon the pro- 
ductiveness of industry. The demand for transportation 
is proportioned to the amount of products to be carried 
out of a country. We have seen that the ability of a peo- 
ple to trade depends on the surplus of goods they have to 
dispose of. That which goes out must pay for what is 
17 



386 EXCHANGE. 

brought in. Hence the bountiful crops which reward the 
labor of agriculture, large proceeds from the mines, the 
success of all manufacturing industry, all subserve the 
profits of the railways. So too, the use of railways for 
travel depends on the increase of individual wealth. It is 
for the interest of these corporations that all whom they 
serve should grow rich, i It is better for themselves and 
for all concerned that their profits should be increased by 
enlargement of business rather than by increasing the rates 
of charges. It is both right and politic for railways to 
favor the prosperity of industry all along their routes, in 
all intermediate places, as well as at the extremities. 

5. By abuse of their power as monopolies, the railway 
corporations may diminish the returns of all industry. 
They may set their rates so high as virtually to deprive 
producers of the advantage of an enlarged market. Thus 
the railway charges for transporting the agricultural pro- 
ducts of the West to the sea-board sometimes absorb all 
the difference in prices. When increased demand abroad 
has raised the price of wheat in the foreign market, the 
railways have been known to increase their charges so as 
to cover all the advance, and rob the Western farmer of 
his share in the advantage. Such a course must be de- 
pressing to industry. It is possible in the relations of the 
parties, but it is a violation of mutual rights in these re- 
lations. Harmony and co-operation characterize the true 
relation of railways to all other departments of productive 
industry. It is a foolish short-sighted policy which, for a 
temporary advantage, disregards this fundamental truth. 

The Administration of Rail^vay Corporations. 

The construction and operations of railways require great 
outlays for which large accumulations of capital are neces- 
sary. This capital is in part gathered by subscriptions for 
stock ; in part, it is obtained by the use of credit. The 



ABUSES FKOM EAILWAT MANAGERS. 387 

oi'iginal corporators pledge themselves for certain shares. 
Then the public and especially the people along the pro- 
posed route are called to add their subscriptions. The call 
is urged by pleading the benefit to be derived from the 
road, and by the promise of profits to stockholders. In 
many cases, farmers and other citizens, unable to advance 
money, have been induced to give their credit by mortgag- 
ing their farms and homesteads. Cities, towns and coun- 
ties also have been persuaded to tax themselves, or to lend 
their credit in the form of bonds for the benefit of the 
road. The stock is then widely distributed to great num- 
bers of persons. The corporation is composed of all stock- 
holders. Such a body is manifestly unfitted for the details 
of business. The corporation is therefore organized by the 
election of a Board of Directors which may be continued 
or changed at each annual meeting of stockholders. To 
this Board is entrusted the choice of officers and the gen- 
eral administration of the company's affairs.. A mighty^ 
power is thus concentrated in the hands of afeio managers. ) 

( Since at meetings of stockholders, votes on all questions 
are taken by count of shares, absentees voting by proxy, it 
is not difficult for the managers, by commanding a major- 
ity of the shares, to control action and retain their j)ower. 
The minority are helpless to resist this power. The di- 
rectors may be true and faithful to the interests of the 
corporation and of the public, so that all shall be well ad- 
ministered. They may use their power to subserve inter- 
ests of their own, antagonistic to both. 

Great abuses proceed from the selfish policy and ruin- 
ous administration of railway managers. By lavish expen- 
diture, and the reckless use of credit, the entire property 
and franchises of many railways have passed under fore- 
closure of mortgages into the hands of bondholders. In- 
dividual stockholders thus lose all they had invested in the 



388 EXCHANGE. 

enterprise. Worse than that, many an humble citizen or 
farmer has to give up his homestead or farm, or struggle 
for years to clear it from the mortgage given for his stock, 
with nothing to offset his loss. 

[ The interests of minor stockholders are often sacrificed 
inWother way, which can best be explained by an actual 
instance. The B. & C. railway was doing a prosperous 
business, which paid handsome dividends and commanded 
for its stock a premium in the market. The B. & D. rail- 
way, running out of the same city in another direction, was 
much embarrassed so that it yielded no profits, and its 
stock was almost worthless. The managers of the B. & C. 
in concert with some others, bought up at very low rates, 
the greater part of the B. & D. stock, and then using, or 
rather misusing the power of their official position, merged 
the stock of the good road in that of the other. The con- 
sequence was that the B. & D. stock rose at once to seven- 
fold its former value, the advantage of which inured to 
the benefit of its shrewd managers and their friends, while 
hundreds of innocent holders of the B. & C. stock saw 
their dividends cut off and their property reduced in value 
one-half, by the treacherous act which they had no power 
to resist and for the wrong of which they had no redress. ^ 

Again we have cases like that of the "Credit MoMUer^' 
on the Union Pacific railway, in which some of the man- 
agers as individuals were organized into a distinct com- 
pany to contract for building the road. As managers, 
they let to themselves, in the above capacity, contracts at 
such rates as made them rich, but tended to impov- 
erish the corporation of which they were the official guar- 
dians. - 

Not unfrequently railway directors operate on a large 
scale, in the speculations of the stock exchange, and manip- 
ulate the affairs of their own corporations so as to raise 
or depress prices as may best suit their own advantage, 



MONET-POWER OF RAILWAY CORPORATIOlfTS. 389 

utterly regardless of the effects on public interests or on 
those whose capital is entrusted to their care. 

. The process of " loatering stock " so-called, in like man- 
ner sacrifices public interests to the selfish greed of railway 
oflBcials. Its effect is to lay on the public extra charges 
that dividends may be paid on double the amount of stock 
actually paid in. ) 

/ Sometimes the officers of a railway engage in the traffic 
of commerce and change the rates of freights to suit their 
own advantage. Then by alternate ruinous competitions 
and grand comMnations they throw uncertainty over all 
the transactions of trade, causing fluctuations by which 
many are made bankrupt while a few of the inside ring 
are enriched. 

Worst of all, is the abuse of the great money-power of 
these corporations to carry measures of legislation for their 
own interests to the detriment of the public weal. The 
modest expression, "putting money, bonds or stocks where 
they will do the 7nost good," means in plain speech, bribing 
Congressmen of weak consciences and buying up State 
legislatures. 

In speaking of these things, we have no sympathy with 
the indiscriminate tirade against these corporations, in 
which some indulge. We do not charge them as sinners 
above all others in these respects. Express companies, 
telegraph companies, insurance companies and other great 
monied corporations indicate more or less the same vicious 
tendencies. We advocate no blind •'•'granger" movement 
of open hostility. On the other hand, we hold in highest 
estimation the benefits conferred on the country by these 
corporations. We count worthy of all honor many men of 
highest integrity connected officially with them, who stand 
manfully for the correction of abuses and the just fulfill- 
ment of their trusts. 

But a clear apprehension and consideration on the part 



390 EXCHANGE. ^ 

of our intelligent citizens generally, in the light of hoth 
economic and moral principles, of the evil as well as the 
good involved, will work out the surest corrective of the 
evil and the truest safeguard of the good. Grave ques- 
tions of legislation are before the country on which the 
people as well as their law-makers need to have an intelli- 
gent judgment. How shall the rights of innocent stock- 
holders be guarded against the machinations of unscrupu- 
lous managers ? How shall these corporations be protected 
in their just private rights, and yet be held under restric- 
tions and responsibilities which will keep them true and 
faithful in their legitimate functions as agents of the 
State for great public interests ? Shall all be left to the 
separate and varying action of the several States, or shall 
the national Congress exercise its constitutional power 
to regulate commerce between the States, by enactments 
which shall be uniform and authoritative over the whole 
country ? The wisest and profoundest statesmanship in 
the land is needed for the solution of these problems. 

But back of all legislation, more effective than all stat- 
utes, is the sound public sentiment, formed and guided by 
a good conscience on the part of the body of our people — 
a sentiment which rests on an intelligent regard for the 
fundamental principles of Political Economy in this as in 
other applications — a conscience which holds individual 
conduct to the ways of justice and honor, and which ex- 
presses itself, through all channels of social intercourse 
and popular influence, in condemnation of treachery, 
fraud and robbery, however subtle and shrewd the pro- 
cesses, however grand the scale of operations, however 
rich the results of successful wickedness. 



CHAPTER XXV. 

COMMERCIAL CRISES. 

Speculation is- the prime cause of commercial crises. 
In its first and best sense, this word is but a name for the 
foresight and mutual confidence which are indispensable in 
all operations of exchange, j It has a bad odor only because 
of its abuse. Mr. McCulloch says "Every transaction in 
which produce is bought that it may be afterward sold is 
in fact a speculation." A merchant's business is to study 
the market so as to buy goods with a well-founded antici- 
pation of selling them at a profit. His success must de- 
pend on the clearness of his foresight and the good judg- 
ment and energy of his action. Credit too must enter 
more or less into both the buying and the selling. As the 
anticipations of profit grow bright and strong, the mer- 
chant is prompted to exert his purchasing power to the 
utmost extent of both his capital and his credit. As one 
does this, others catch the impulse and the spirit of specu- 
lation pervades the whole community, stimulating all de- 
partments of business to unwonted activity. Kept within 
proper limits, such a movement is healthful and safe. The 
trouble is that unwittingly, individuals pass the limit of 
safety and are borne on by forces of which they are not 
sensible, till over-production, over-importation and the 
excessive extension of credit bring on a sudden revulsion. 

When for whatever reason, prices are subject to consid- 
erable fluctuations, especially if they are connected with 
an unstable currency, there springs up what Adam Smith 
calls '' the trade of speculation." This is a species of gam- 



392 EXCHANGE. 

lUng. A class of men devote themselves to the study of 
fluctuations, with a view not to actual trade, but to betting 
on the rise or fall of prices. At the Chicago corn exchange, 
for instance, two men enter into a contract, the one to de- 
liver and the other to receive ten thousand bushels of wheat, 
after thirty days, at a certain price; the one presuming 
that the market price will decline before the day of delivery 
comes, the other that it will rise. The thought of an ac- 
tual transfer of the wheat does not enter the mind of 
either. The transaction is a mere bet on the future price, 
and when the time matures, it is closed by the loser's pay- 
ing the difference between the market price and the price 
named in the contract. Such men throng the stock-board, 
the gold room, the corn exchange, the cotton market, the 
wool market. This, like all other gambling, has its tricks, 
its artificial appliances to affect prices. .The " hutts " use all 
means possible to raise the market price, and the '' hears" 
labor unscrupulously to depress it. These operations al- 
ways aggravate the rising fever of speculation in the com- 
munity. Men grow impatient of the "slow and sure" 
gains of regular trade, and are dazzled, like those who 
dabble in lotteries, by the vision of sudden fortunes. 

[ A Panic is the turning-point when the revulsion oc- 
curs ; when baseless anticipations are disappointed and 
mutual confidence suddenly gives place to general distrust. 
When men have entrusted their property to the care of 
others, whatever comes suddenly to shake their confidence 
may produce a panic. 

An individual or a corporation may thus be suddenly 
overwhelmed m^7i wo /?^s^ cawse. This was illustrated in 
the case of the National Gold Bank and Trust Company 
of San Francisco, in 1875. Just after a careful investiga- 
tion had shown the company to have assets amounting to 
$1,300,000 in excess of all liabilities, a check for $4000 was 



PANICS. 393 

presented and payment was deferred in order that some 
irregularity in the form of the check might be corrected. 
Thereupon the holder of the check industriously circulated 
the statement that the bank could not pay a four thousand 
dollar check. This started a panic. The depositors rushed 
in to draw out their funds. After paying half a million, 
the bank was compelled to close its doors and go into liqui- 
dation. 

\ Sometimes the undue expansion of credit for purposes 
of speculation in a single hranch of trade, brings on a 
panic and collapse. Mr, Tooke states a case which shows 
how credit in the simple form of book accounts may be 
expanded and lead to this result. In 1839, difficulties be- 
tween England and China threatened war. Anticipating 
a suspension of the importation of tea, certain dealers in 
that article hastened to buy up the stock in the market 
that they might secure a greater profit on account of the 
expected scarcity. This action itself disturbed the market 
as it was, and the price of tea rose rapidly till it was ad- 
vanced one hundred per cent. The anticipations seemed 
thus to be realized. One dealer whose capital did not ex- 
ceed £1200, and that locked up in his business, pushing his 
credit to the utmost, was able to purchase four thousand 
chests valued at £80,000. But the enhanced price of the 
article diminished consumption, and by indirect importa- 
tion, there came an unlocked for supply. The speculation 
failed. Those who had freely given credit to the specula- 
ting dealers were thrown into a panic which precipitated 
the crisis and aggravated the disaster to all concerned. 

(^ The balance of men's judgment is apt to be disturbed 
by extraordinary profits from any ^production, and they 
are tempted to push their credit beyond safe bounds. With 
increased income, they adopt a more luxurious style of 
living. At the same time, they make large outlays to 
extend what seems a profitable business. Such signs of 



394 EXCHANGE. 

prosperity make it easy to borrow, for the excitement 
affects lenders also. Thus out of a real fact, imagination 
creates an illusion and all parties are led by a "Will o' the 
wisp" away from solid ground. Suddenly the deceptive 
light goes out, and lost in the swamp, each in the panic 
of the hour, trying to save himself, pulls his fellow down. 
Thus, a few years ago, thrifty farmers of the Connecticut 
River Valley realized great profits from the culture of to- 
bacco. The sudden gains turned their heads. From their 
old frugal ways they ran into extravagance in living. To 
increase future profits, more fields were plowed, costly fer- 
tilizers were applied and expensive help was employed. 
The merchants and the banks freely gave credit to the 
prosperous farmers. All promised well, till through some 
freak of speculators in the market, prices declined. Then 
the crisis came and the gathered crop was hardly sufficient 
for a tithe of the debts for which it had been pledged. 
Under the panic, real wealth was sacrificed by forced sales, 
and men of integrity and means, who with time to turn 
what they had, could have met all liabilities, went down 
with weak and reckless adventurers. 

[^ Often a combination of such influences affects the busi- 
ness of a whole country through a general expansion of 
credit and hold sfcculation. ;The movement ordinarily 
starts with some real occasion. There may be on the one 
side, capital accumulated but unemployed, and on the 
other, rich resources of wealth which labor is waiting to 
develop. It is the legitimate office of credit to unite these 
two elements of production. In such circumstances, 
their union yields extraordinary profits, and great ex- 
pectations draw out credit indefinitely. Under this un- 
wonted stimulus to every department of business, the 
whole community becomes infected with a mania of specu- 
lation. Credit starting from solid ground, pushes out its 
structure unsupported over a yawning chasm, till it is 



THE CKisis OF 1837. 395 

ready to break by its own weight. Then whatever inci- 
dent comes to test it, reveals its weakness. The first crack 
of the framework sends out a report which starts a panic 
and the crash is inevitable. 

All this is well illustrated by facts of the commercial 
revulsion of 1837. During the earlier part of the preced- 
ing decade of years, all branches of business were highly 
prospered. Railways and steam navigation on the lakes 
made an easy way for domestic and foreign emigration to 
go and develop the rich resources of our Western lands. 
This gave a healthy stimulus to the productire industry 
and commercial enterprise of the older States. By credit, 
unemployed capital was drawn into use and labor was in 
great demand. Interest, wages and the prices of goods 
rose together and all over the country, men were really 
growing rich. But they were not content with the old 
slow and sure progress. All foresaw that the cheap lands 
of the West must be rapidly enhanced in value. This 
promise of the future, working on the imagination, started 
a fever of speculation which spread like an epidemic. It 
was fed on credit universally extended. This extraordinary 
stimulus was intensified by political action connected with 
the suppression of the United States Bank. The transfer 
of the government deposits to State banks and the distri- 
bution of the nation's surplus revenue among the States 
led to a great increase of the paper currency and to a 
free extension of credit for all sorts of enterprises. In the 
West, to supply the lack of money, "wild-cat"' banks 
were established aad issued their baseless circulating notes 
in profusion. Goods and lands and city lots were ex- 
changed for small payments of money — itself resting 
mainly on credit — and a large balance of credit on long 
time. 

Thus during the years 1835-6, the bubble of speculation 
was inflated to its utmost dimensions by the expansion of 



S96 EXCHANGE. 

credit in every form. In the beginning of the year 1837 
there were in the country 634 banks, with less than $38,- 
000,000 in specie issuing $150,000,000 of notes and dis- 
counting $525,000,000 of paper. Individual credit was 
proportionally extended. The wildest speculation was en- 
gaged with Western lands and city lots. Not only the bold 
pioneers of the frontier but thousands of sober Eastern 
people were drawn into hazardous ventures. The site of 
Milwaukee was opened to white settlers in 1835-6. Its 
advantages were quickly discerned, and adventurers has- 
tened thither by hundreds. A city was laid out, and the 
prices of lots doubled every few weeks. Men who came 
with nothing soon counted their wealth by thousands. 
But sales were made almost entirely on credit, and the 
quickly made fortunes really consisted of piles of promis- 
sory notes, or of figures doubled- in the inventory of lots, 
whose estimated value could be realized only by the city's 
growth for twenty years. Yet nobody perceived the illu- 
sion ; the dream seemed reality for the time. Even the 
honest French trader, the original owner of the site, who 
was paid a substantial compensation for his title, embarked 
his little fortune again on the sea of speculation to be lost 
forever. Similar transactions were going on in hundreds 
of other places. 

At the same time, in the East, ideal fortunes suddenly 
acquired, prompted extravagance in drSss and living which 
caused large importations of foreign goods. The real 
wealth of the country must go out to pay for these, es- 
pecially the gold and silver ; for credit currency never goes 
abroad. The way was thus prepared for a sudden and dis- 
astrous collapse. Its immediate cause was, strange to 
say, the unusually large crop of cotton in 1836. Southern 
merchants and brokers had given the planters credit in the 
expectation that previous high prices would continue. But 
the price in the foreign market declined. The planters 



THE PROBLEM OF COMMERCIAL CRISES. 39? 

could not make good the difference, lienee the cotton fac- 
tors could not meet their obligations to their New York 
correspondents, and their paper was dishonored at the 
banks. Tliese failures created distrust, the panic followed 
and the bubble burst. Prices suddenly fell, banks sus- 
pended, business stopped and the financial chaos with its 
attendant stagnation and distress was universal, and con- 
tinued for several years. 

Such, with manifold slight variations, is the ordinary 
course of things in a general commercial crisis. The real 
mischief is done in the earlier stages, when all goes on so 
well that nobody thinks of danger. The panic is inev- 
itable as soon as men begin to see on what a slender base 
they have been building their hopes and working out their 
schemes. The lessons of sad experience are, however, very 
soon forgotten, and these phenomena recur quite regularly 
in smaller and larger cycles of ten and twenty years. 

,' The practical problem is how to preserve and perpetu- 
ate the balance hetioeen confidence and caution — how to give 
scope for the use of credit with proper checks against its 
abuse. Legislation may be called on to establish a stable 
currency and then to keep it stable by letting it alone ; also 
to provide equitable laws for defining and enforcing con- 
tracts, and then to maintain these laws with the least va- 
riation possible. As the chief means for avoiding the re- 
currence of these fearful convulsions, we must have a 
more thorough incorporation into the usages of business, 
of the simple principles of Political Economy. As of 
special importance in their bearing on this problem, we 
reiterate the following : 

1. The natural standard of value and price for all arti- 
cles is the cost of production including a fair profit. 

2. Though the alternations of supply and demand pro- 
duce more or less of temporary variation, there is a natural 



398 EXCHANGE. 

tendency to an equilibrium of prices on this constant basis 
of cost, 

3. Stable and healthy prosperity of business depends on 
maintaining this equilibrium generally ; but mischievous 
speculation aims always to disturb it. 

4. The trice functions of credit are to bring accumulated 
capital into productive union with labor, and to facilitate 
exchanges by bridging over gaps of time and distance. 

5. When men purchase with credit, they draw upon a 
fund which has no definable limit. High hopes impel 
men to extend their purchasing power to the utmost by 
adding to their ready money all the credit they can com- 
mand. This is the point of danger. 

6. This element in the market disturbs the equilibrium 
of prices without respect to the true standard ; an artifi- 
cial demand is created which finds no check because ad- 
vancing prices and profits apparently increased, seem to 
warrant the further expansion of credit. 

7. Hence comes that "excess of speculative purchases" 
which Mr. Mill calls the prime cause of a commercial crisis, 
and which leads to the sudden recoil of prices and the con- 
sequent collapse. 

8. The panic which follows is as rash and unreasoning 
as was the confidence which blew the bubble, and precludes 
the application then, of any effectual relief. 

9. The necessity of turning all kinds of property into 
money to meet indebtedness, fills the marhet loith sellers, 
lohile feio are ready to buy, and prices sink as far below 
the standard as they were previously raised above it. 

10. Then production must be suspended and business 
stand still, till adjustments are made and the basis is laid 
for starting again by the true standard, with mutual con- 
fidence qualified and restored. ) 

At this date, 1878. the financial condition of the whole 



A WOELD-WIDE CRISIS. 399 

civilized world is and has been for three years, such as was 
probably never known before. Heretofore, separate nations 
have had their commercial crises from time to time, trace- 
able to peculiar local causes. Now all civilized nations 
seem to be brought at once and together into this condi- 
tion. Each country shows some symptoms peculiar to it- 
self, but in its general features, the distemper is one and 
the same everywhere. Suspended production, stagnation of 
trade, general distrust, bankruptcies, defalcations, strikes, 
idleness and distress of workingmen are reported from 
every quarter. We cannot pretend to offer a full explana- 
tion of the case, much less to prescribe a certain remedy. 
Some things are apparent, however, which have contrib- 
uted to this result, and may be concisely stated. 

First. Within the last sixty years, the invention and 
introduction of labor-saving macliinery has changed the 
methods and greatly increased the results of productive 
industry.j The wealth thus produced is not at all in ex- 
cess of the needs of men, but the problem of its wise dis- 
tribution to meet those needs is not yet solved. 

Second; The use of expensive machinery for manufac- 
tures and of steam for transportation, requires that every 
kind of business be conducted on a large scale, with large 
capital, and in large estahlishments. ] Hence a necessary 
expansion of credit and greater risks^ both tending to in- 
crease the speculative character of business. 

Third. ' This large way of doing things, in connection 
with the multiplied conveniences, comforts and luxuries 
of living, has induced a sudden increase of extravagance 
quite universal, in the habits both of business and of do- 
mestic life. ' 

Fourth. Steam navigation, railways and telegraphs now 
hold all nations in such close commercial intercourse, that 
when one suffers all must suffer with it/ 

Fifth. Wars now produce much more disturbance of 



400 EXCHANGE. 

general commerce than formerly. They are also vastly more 
expensive, and leading to the extension of national credit, 
they work a yet greater disturbance of the world's finances. 

Sixth. Within the last twenty years have occurred 
two wars — that of the Eebellion in the United States and 
the Franco-German war in Europe — both affecting very 
closely the vital ce)itres of the world's industry and com- 
merce. 

These causes, many of them working silently and un- 
noticed for years, seem to have gathered to a head in these 
passing years, with such sad results as have been noticed. 
We cherish the fond hope that out of the present evil will 
come a greater good, in^the better apprehension of the true 
brotherhood of nations, of the fundamental principles of 
Political Economy and of the application of these princi- 
ples both in minute details and in broad generalizations, 
to human industry and trade the world over. 



THE END. 



INDEX. 



Adam Smith's Maxims on Taxation, 348. 

Afflicted Classes, expenditures for, 147. 

Agriculture, a healthful employment, 
31; rent of lands for, 202; chief 
industry of Western States, 379. 

Agricultural products, home market 
for, 368. 

Amsterdam, Bank of, 333. 

Artists, compensation of, 187. 

Authors, compensation of, 188. 



Banks, origin of name, 329; agents of 
credit, 329; offices of, 329; histori- 
cal facts of, 332 ; of Venice, Ge- 
noa, Amsterdam, Hamburg, 333 ; of 
England, 334 ; Scotch system, 335 ; 
of France, 335; U. S. Banks, 3:^8; 
State Banks, 337 ; safety fund and 
Suffolk Bank systems, 338 ; free 
Banking, 338 ; National, 339 ; liabil- 
ities of, 34 1 ; resources of, 342 ; 
profits of, 343. 

Barter, difficulties of, 283. 

Bounties, 375. 

Brassey on wages, 161. 



O. 

Capital, defined, 73 ; origin of, 74 
forms, 76 ; consumption of, 79, 120 
productive and unproductive, 81 
fixed and circulating, 83 ; relation 
to labor, 88 ; general distribution 
of, 92 ; ratio of to labor, 93 ; re- 
muneration of, 197 ; may not claim 
all profits, 243. 

Clearing House, noticed, 317. 

Coinage, purposes of, 301. 

Combinations of employers, 110, 179. 

Commercial crises, causes of, 391 ; the 
turning point, a panic, 392 ; exam- 
ples, the Gold Bank of S. Francisco, 
392; the English Tea speculation, 
393 ; Tobacco raising on the Con- 
necticut River, 394 ; the crisis of 
1837, 395; the practical problem, 397; 
disturbance of the world's finances 
in 1878, 398. 



Competition, affects wages, 172; com- 
binations to resist, 175. 

Co-operation of labor and capital, the 
principle, 88; happiest in one person, 
89 ; conditions which favor, 92 ; re- 
ward for each, 96 ; freedom to both, 
102; promoted by moral and intel- 
lectual culture, 107. 

Co-operative associations, 110, 245. . 

Consumption, its nature, 15, 112 ; forms 
of, 114 ; objects, 116 ; for reproduc- 
tion, 117; for gratification, 125; 
public, 136 ; purposes of public, 139. 

Credit an instrument of exchange, 309 ; 
its nature, 309 ; forms, 310 j func- 
tions, 311 ; abuses of, 321 ; mischiefs 
of abuses, 325. 

Currency defined, 344 ; four kinds, 344; 
evil-s of credit currency, 349. 



33. 

Desikes, conflicting, 7. 

Distribution, what it implies, 16 ; scope 
of, 151; parties to, 152 ; sub-division, 
153; of profits, 2.39. 

Dividends,defined, 234 ; include interest 
and profits, 237. 

Division of labor, the principle, 48 ; 
special advantages, 51 ; limitations, 
58 ; incidental evils, 64 ; interna- 
tional, 66. 

Duties, specific and ad valorem, 253. 

E. 

EcoNOMT, rules of, 128 ; in the house- 
hold, 131. 

Education, expenditures for, 144. 

England, bank of, 334. 

Exchange, its scope, 16 ; nature of, 203; 
fundamental principles, 267, necessi- 
ty of, 270; international, 272: agents, 
275 ; money its instrument, 282 ; 
credit its instrument, 309. 

in. 

Fees, to whom applied, 155. 

Foster, L. S., on taxing mortgages, 261. 

France, bank of, 335. 



402 



INDEX. 



Free-trade, defined, 354; presumption 
in favor of, 355; between American 
States, 379. 

Gr. 

Genoa, bank of, 333. 

Government, expenditures for, 139; 

revenues, 248; agency respecting 

money, 299. 

H. 

Hamburg, bank of, 333. 
Home-market, how formed, 368. 



Income tax, 356. 

Improvements public, expenditures 
for, 143. 

Interest, defined, 315 ; rate how deter- 
mined, 318 ; why high in a new 
country, 335 ; not an index of pros- 
perity, 239. 



jBrPKET, Lord, description of steam 
engine, 47. 



Labor, defined, 19 ; measures value, 19 ; 
kinds, 30 ; physical moves. thiuM, 
SO; mental, what it does directly, 
21; what indirectly, 34 ; productive 
and unproductive, 35 ; changes 
effected by, 26 ; means of increasing 
its efl'ectiveness, 33 ; consumption 
of, 120 ; remuneration of, 154 ; nom- 
inal and real cost of, 150 ; eificiency 
affected by various causes, 162. 

Mercantile system, error of, 9. 

Mill, J. S., his fundamental principles 
of exchange. 267. 

Money, an instrument of exchange, 282 ; 
definition and functions, 284 ^ a 
standard of value, 285 ; a medium 
of exchange, 286 ; essential quali- 
ties, 287, 390 ; articles used, 289; 
adaptedness of gold and silver, 393 ; 
general truths concerning, 296 ; 
agency of government respecting, 
299 ; coinage, 301 ; double standard, 
305. 

Monopolies, limit supply, 14. 

Moral and intellectual pleasures, eco- 
nomical, 133. 

Natural agents, defined, 32 ; for creat- 
ing momentum. 35 ; for applying 
momentum, 43. 



Panics, nature of illustrated by exam- 
ples, 392. 

Political Economy, the name, 3 ; de- 
fined, 4 ; fundamental laws, 4; 
materials of the science, 6 ; regards 
self interest, 6 ; its practical end, 
15 ; divisions, 15. 

Povprty, expenditures to relieve, 148. 

Production, defined, 15 ; involves labor 
applied to nature's gifts, 17. 

Profits, meaning of, 239 ; how to be dis- 
tributed, 242 ; part due to laborers, 
346. 

Property, right of established by la- 
bor, 5 ; division of necessary, 97 ; to 
be secured by law, 99. 

Protection, defined, 354 ; arguments for, 
358 ; lays an unequal tax, 361 ; a 
restrictive policy, 366 ; positive ob- 
jections to, 373. 

Tt. 

Railway corporations, creatures and 
agents of the State, 382 ; practical 
monopolies, 384; relations to genera! 
industry, 385 ; administration of, 
386 ; abuses from managers, 387; 
monej' power of, 390. 

Rent, defined, 199 ; kinds of, 300 ; Ricar- 
do's theory, 201 j for agricultural 
lands, 302 ; in cities, 310 ; why less 
than interest, 313. 

Ricardo's theory of rent, 301. 

Restrictions on industry, mischievous, 
105. 



Salaries, how applied, 154 ; principles 
governing, 185. 

Science, expenditures for, 143. 

Scotch banking system, 335. 

Speculation, defined, the cause of com- 
mercial crises, 391. 

Strikes, 175. 

Sumptuars'^ laws, 106. 

Supply and demand, law of, 14 ; ad- 
justed by freedom, 327. 

T. 

Tariffs, 253. 

Taxation, relation to public expendi- 
ture, 136, 348 ; Adam Smith's max- 
ims, 249 ; direct and indirect, 350 ; 
American, 354 ; National, 255: State, 
357; double on mortgages, 259. 

Trades-unions, 176. 

Transmutation, transformation, trans- 
portation, effected by labor, 26. 

TJ. 

Usury laws, mischief of, 230. 
United States Banks, 336. 



INDEX. 



403 



Value, defined, 11, 264 ; distinct from 
price and utility, 12, 255 ; limits of, 
13; determined by cost, 266. 

Venice, bank of, 333. 



Wages, defined, 154 ; nominal and real, 
156 ; rate of, how determined, 166 ; 
necessary, 167; customary, 171; af- 



fected by competition, 172 ; general 

law, 181 ; special causes afiectiug, 

183. 
Wage-fund theory, 169- 
Walker, Amasa, on nominal and real 

wages, 157. 
Walker, F. A., on industrial efficiency, 

163. 
War, expenditures for, 149. 
Wealth, defined, 8 ; errors respecting, 8; 

sources of, 10 ; how increased, 11. 
Women's labor, remuneration of, 190. 



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